This paper examines the effects of changes in the variance of income distribution on both capital accumulation and social welfare in Japan, the
society with an aging population. To analyze the problem, we adopt a simulation approach for an extended life-cycle general equilibrium model
of overlapping generations with continuous income distribution. The simulation results indicate that the changes in the variance affect economic variables under a progressive tax scheme but they do not under a proportional tax scheme. The results also show that social welfare greatly increases as the variance shrinks. Therefore, the recent shift in Japan, where the taxation system has tended in effect to become flat, may cause a significant damage to social welfare.