Abstract

This paper presents a computable general equilibrium (CGE) framework to numerically examine the effect of tax/subsidy reforms 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: A 50 percent tax cut of the pharmaceutical industry, or a 50 percent subsidy increase for the hospitals sector induces a welfare gain of 95.6 billion or 72.3 billion Japanese yen, respectively, when the government budget is not balanced. However, such an unbalanced budget policy also generates new de cits of 9.26 billion and 5.58 billion Japanese yen, respectively. Even when the government budget is balanced, welfare enhancing reforms are still possible but only with sacri ces of the pharmaceutical industry. If the pharmaceutical industry is also compensated in a balanced budget policy, then welfare enhancing reforms only within health related sectors seem implausible. While the best reform with a compensation policy results in a welfare gain of 61 billion Japanese yen, such a reform still generates de cits of 4.4 billion Japanese yen. If the government tries to minimize de cits with a compensation policy, then de cits can be reduced to 0.62 billion Japanese yen, but a welfare gain completely vanishes.