Measuring the Impact of Population Aging on Tax Revenue: Evidence from Japan and Korea

Abstract

This paper assesses empirically the tax implications of population aging in Japan and Korea. We achieve the research objectives by taking two approaches: (1) a vector autoregression (VAR) analysis; and (2) an estimated dynamic stochastic general equilibrium (DSGE) framework. Based on data from 1973 to 2015, the VAR results for both countries reveal that an aging shock decreases GDP, hours, consumption, and investment. As the tax bases fall, so do tax revenues. Conditioned on estimated DSGE models, the second approach is to characterize Laffer curves at two steady states: the current (as of 2015) and aged (as of 2060) states. We find that the adverse effect of population aging on tax revenues is more serious for Korea than for Japan. Even in the aged state, Japan has room to generate tax revenues comparable to the current state, whereas combinations of tax rates satisfying this property do not exist for Korea.