Consumption Taxation to Finance Pension Payments

Abstract

Research QuestionBudget-neutral reductions of the social security contributions financed by higher consumption taxation to foster economic performance and international competitiveness range high on the political agenda within many, especially European, economies. A lot of economic analyses indeed report positive macroeconomic effects of such a tax shift. However, implications for holdings of net foreign assets and distributional aspects are addressed little in the literature. ContributionIn this paper, we use an overlapping-generations-augmented two-region general equilibrium framework with search frictions on the labour market to assess such a tax shift. Especially the overlapping generations structure allows for effects not present in standard representative agent models. ResultsAs in the literature, the tax reform partially shifts the tax burden from domestic to foreign producers and lowers marginal costs of domestic production. Thereby, it generates positive domestic macroeconomic effects. The tax reform also generates a policy-induced increase in consumption costs and partially postpones a household's tax burden to retirement. This leads to higher savings and increases domestic assets as households prepare for the cost increase. Along the transition path, however, this makes retirees and households close to retirement worse off. Moreover, the increase in domestic net foreign assets implies that consumption of foreign households eventually falls, which stands in contrast to what is commonly found in models without an endogenous savings motive. The rise in interest payments foreign economies have to pay can exceed the positive demand spillovers such that positive effects on foreign consumption eventually turn negative.

Pension Systems (Un)Sustainability and Fiscal Constraints: A Comparative Analysis

“…We consider however consumption taxation. This has long been known to be less distortive than income taxation, see Milesi-Ferretti and Roubini (1998) or Conesa et al (2020b), and it is increasingly considered as a realistic option to finance the burden of public pensions, see for example İmrohoroglu et al (2016) and Ruppert et al (2021). For computational tractability, given our multicountry focus, the quantitative analysis does not include idiosyncratic (income) uncertainty, as for example in İmrohoroglu et al (1995), Storesletten et al (1999) or Fehr et al (2008).…”

Using Energy and Emissions Taxation to Finance Labor Tax Reductions in a Multi-Sector Economy: An Assessment with Emuse

“…All these studies find positive effects of such tax shifts. Ruppert, Schön, and Stähler (2021) discuss distributional consequences of such a tax shift in a framework with overlapping generations. They find that, at the time that the tax shift takes place, current retirees and those close to retirement do not benefit from the tax shift because policy-induced consumption costs increase too much.…”