Using Final Tax Return Data for Heterogeneous-Agent Dynamic General Equilibrium Model

Graduate School of Economics, Nagoya City University

with Hiroshi Gunji (Daito Bunka University), Kenji Miyazaki (Hosei University)

We use novel Japanese final tax return (FTR) data to estimate both the progressive income tax function and income shock. We also study the macroeconomic and distributional implications of using them in the heterogeneous-agent macro model. Tax progressivity in the FTR data is low and almost flat regarding the tax function. Regarding the income shocks, the FTR data indicate that both the variance and persistence of income shocks are larger than the estimates based on Japanese survey data. The model calibrated based on the FTR data overestimates the income and asset inequality of the Japanese data but successfully replicates the consumption inequality.