Income Redistribution Effect of a Shift from Income Deduction to Tax Credit -Discrete Choice Model-Based Simulation Incorporating Labor Supply-

Contemporary policy dialogues in Japan suggest that tax credits should replace income deductions in order to enhance the redistributive effect of personal income taxes. Several microsimulation studies have examined the effects of such proposals and have attempted to quantify their changes. However, these simulations were mechanical in that they failed to capture the labor supply responses caused by such a swap. Therefore, this study employed analogous simulations, allowing for the behavioral responses of individuals using household data from 2017. Our behavioral simulations indicate that, while revenue-neutral replacement causes only a slight reduction in labor supply, it does indeed increase the redistributive effect through a 0.74% (1.36%) reduction in the Gini coefficient (Theil index). The 0.43% (resp. 0.67%) decrease for analogous mechanical microsimulations was only half the size of the effect we found. This study demonstrated that the choice between behavioral and mechanical models is important when microsimulating the redistributive effect