| Research Abstract |
Since the rates of excise taxes vary drastically from item to item, it is often concluded that indirect taxes have caused a substantial distortion in the price system of the economy and hence the efficiency cost is believed to be very high. The purpose of this project is to undertake an applied general equilibrium study for Japanese indirect tax system in order to answer this question.
The applied general equilibrium approach is a recent development in economic methodologies of policy evaluation, which utilizes fixed point algorithm in empirical model with general equilibrium framework. The impact of the introduction of fixed point algorithm into economics is twofold; first, it provides alternative proof of existence for the general equilibrium theory. Second, it opens an entirely new aspect to the theory, namely quantitative analysis. The latter has a practical meaning for the assessment of policy effects (pros and cons).
Here, we simulate several hypothetical changes of indirect tax system, after constructing 15 sector general equilibrium model of our economy and empirically estimating excess demand functions for these sectors. Our results show that the efficiency costs of our current system is huge (which supports our intuition) and that the shift to uniform tax rate system or at least the reduction of tax rate divergence is to increase aggregate income (which provides a supporting evidence for Ramsey proposition of optimal taxation).
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