The Impact of Marginal Tax Reforms on the Supply of Health Related Services in Japan

This paper presents a computable general equilibrium (CGE) framework to numerically examine the effect of marginal tax reforms on the supply side of health related sectors. The generalized framework with the latest Japanese input-output table of year 2005 with 108 different production sectors provides the following results: An expansion of the subsidy to the hospital sector creates the largest welfare gain when the government does not take into account its financing explicitly. The effect of such a policy on economic efficiency is more than ten times as much as the cost. However, such an expansion policy does necessarily not eventuate in the largest gain anymore if the government considers its balanced budget. The ’reduction’ of the subsidy to the hospital sector results in the largest welfare gain if the government uses its surplus induced by the reduction of the subsidy, in order to decrease the tax imposed on the social welfare sector. Furthermore, if the hospital sector is compensated by lump-sum trasfers when its subsidy is reduced, then a welfare gain could become larger. If the govenment uses its surplus not only for reducing the tax on the social welfare sector but also for providing the hospital sector with lump-sum transfers in order to keep its income unchanged, then a larger welfare gain would be obtained, even if the government implements a balanced budget policy. This implies that a welfare enhancing tax reform within health related sectors is plausible as long as the subsidy to the hospital sector can be reduced. Such a reform does not create any new government deficit either.