Analysis of the Effects of Financing Methods on Social Expenditures

Abstract

We analyzed the simultaneous effects of social expenditures and financing method based on a single computable general equilibrium (CGE) modeling framework. The advantage of employing this analysis tool is that it can consider intermediate inputs in the production process, inter-relationships among economic institutions, and heterogeneity of households. If our main concern is growth and distribution, household heterogeneity is especially important. For a given amount of social expenditures, collecting corporate taxes is less damaging to the economy as a whole, especially in terms of growth, employment, and income redistribution. On the contrary, taxing the household sector directly causes a relatively severe loss of economic efficiency. The decrease in disposable income caused by this tax increase negatively affects household consumption and savings, although the increase in social expenditures shows no significant positive effects on the national economy.