wage-earners pay a higher price of taxation for the reason of
simplicity to businesses as proposed by the government. Tax
Structure and Economic Development In the period since
the Meiji Restoration, there has been government transfer
and tax incentive from the peasant and wage earners to
business to stimulate growth. Japan has had phenomenal
growth in the past hundred years, however, the question is
that if there is a direct relationship between tax structure and
economic development. In Table 3, y/N stands for per
capita real GNP with N as the total population, Ag/Y is the
agricultural products’ share in GNP with Ag as the output of
the primary sector, M/Y or (M+X)/Y as the openness of the
economy where M and X stand for import and export
respectively. As seen in Table 3, there is a significant
correlation between y/N, Ag/Y and T/Y between
1885-1944. Before the war, the agriculture sector still
played an important role in taxation structure. This is often
referred to as the dual sector and where the taxes in the form
of land taxes were charged heavily in taxation. There is also
no correlation between the postwar period of 1951-86 but
y/N and T/Y are still significantly related. As from
1951-1986, openness provides a better index than the other
two variables mentioned 25 years before the prewar period,
and it becomes even more significant in explaining T/Y for
the postwar period. Therefore, there is a correlation
between the openness of the economy, which is imports and
exports and the taxation structure. However, one could
emphasize the passive nature of the evolving tax system , in
which one could even say that the major determinant of tax
structure change is the structural change in the economy itself
during the process of economic development. When we
consider Table 4, where Tl is land taxes, Ti is indirect taxes,
and Ty income taxes on individual and corporate income. It
shows the relationship (R2)that land taxes made up the
principal shares revenue in 1885-1898 while indirect taxes
made up 1899-1935 and incomes taxes from 1936-86. This
proves the time division as mentioned above. However,
more importantly, as y/N increases, Tl/Tn and Ti/Tn
decreases. The relative importance of land and indirect taxes
faded when growth increased. As for the openness (M/Y or
(M+X)/Y) can be explained from the opposite signs in Ti/Tn
before and after the war (3.101 to -1.808). The negative
correlation after the war showed that openness was no
longer effective in increasing the indirect tax base at this level
of economic development and that the declining importance
of indirect taxes happen to have a close bearing with the
openness in a growing economy. That leaves us with Ty/Tn
dominantly affected by y/N, with the relative share of income
taxes rising in the course of development. The supply-side
point of view emphasizes the link between savings and
investment with I=S+(T-G) with net export as zero. As taxes
revenue were greater than government expenditures before
1975, investment from saving could be maximized. With net
exports as positive, it would also help on investment in the
country. As seen in Table 5, there was constant government
surplus before 1975. Therefore, it was only 1975, that the
government could continue the role using taxes to promote
investment and growth. As deficit grew, it would eat into the
savings and therefore investment. This was also the
tax-cutting policy which was before 1975 to prevent the
overburden of the tax payer with their high elasticity of
personal tax revenue. The growth can be shown using the
formula k=sx-(n+d)k which means for an increase in capital
stock savings has to be larger than depreciation. The
Japanese government promoted savings through tax cuts and
tax incentives and also allowed increased depreciation under
tax laws more rapid growth. Studies of the impact of the
special tax measures on Japanese economic growth are, for
the most part, inconclusive. There is virtually no relation
between the special tax measure to promote household
savings and the rate of private savings. Many of the special
tax measure were used in industries that were not regarded
as strategic from the standpoint of growth, such as the textile
industry which received favorable treatment but grew
relatively slowly. As mentioned above, though, the initial
depreciation allowances were used widely for expansion and
modernization in such strategic industries as steel and
machinery. Therefore, except for the stimulus in these
industries, the special tax measure did not have a substantial
effect on investment and growth. Although the tax system
and its effect on the economy is inconclusive, tax system may
affect economic activity in several ways. First, fro business
and managerial incentives, the regular salary earners with tax
withholding has a fully taxable income. As for the business
innovator and risk taker, the rewards are scarcely taxed by
the tax system which permits the tax-free accumulation of
capital gains and requires only modest tax payments on other
property incomes. As for management incentive, the typical
manager obtains his satisfaction through prestige of job,
expense of account which is often easily deductible under tax
laws. Implicit tax exemption fro unrealized capital gains
derived from undistributed corporate earnings permit the
manager to accumulate large amount of corporate wealth.
Second, the effect on economic stability, Japan with its high
elasticity on income taxation could be used for the stabilizing
effect of the economy to cushion the economic bumps.
However, the Japanese government has reduced the tax rate
and used monetary policy for short-run stabilization. As for
the effects on saving and investment, gross savings increased
from about 25% of GNP in the mid-1950s to about 40% in
the 1970s. Increase of the stock of capital is important for
growth because it raises productivity directly and permits the
adoption of newer and more efficient technologies. The
national budget with its surpluses added to the national
saving and helped to provide the margin of resources needed
for the production of large and growing volume of investment
good. Government savings also averaged above 40% of
private savings even with the annual tax reductions. This was
due to the systematic underestimation of tax revenues. The
policies to promote private investment such as accelerated
depreciation makes bankers more willing to make loans.
Therefore, the tax incentives made have had an indirect
effect on investment and growth. Finally, the simple fact that
the low tax rate in Japan may be the prevailing explanation
for the high rate of private saving and investment in Japan.
Other Determinants of Tax Structure Development and
Growth The military factor before W.W.II and after was
reduced drastically to less than 1 % of GNP. Before the
W.W.II the figure was around 28% of GNP. This is low in
international comparisons of military expenses-GNP ratio
where it is 6.3% in the USA. Japan has a low level of
welfare commitments. The average transfer payments to
national income in 1961-1970 in various countries was
20.8% in France, 7% in USA with 5% in Japan. By 1984,
the US ratio grew to 15.1% while France went up to
35.2%, in comparison with Japan’s 14%. Another factor is
the savings in Japanese thriftiness. Even at high direct
taxation on the wage earner, the average saving rate was still
between 25% and 40% GNP. This started since the Meiji
Restoration with moral suasion from the government with
slogans like "Let us avoid all luxuries so that we keep up
with the world; truly the development of our national
productive strength has its roots in reverent obedience." This
was coupled with the favorable inheritance tax laws and
capital gains law that made accumulation of wealth feasible
and worthwhile to the family centered Japanese worker.
Future of Tax System in Japan As seen in Table 5, huge
deficits arose since 1975 from the first oil shock and
accelerated due to the second one and amounted to 4.4 %
of the GNP in 1979. This has caused more alarm compared
with other countries with similar levels of debt. The
government was no longer able to cut taxes on personal
taxes and government incentive programs because of their
large losses in tax revenue were cut (Table 1). On top of the
economic repercussions, the original tax system was
repressive and unjust for the stress on simplicity. In 1989,
the Value Added Tax (VAT) was added as the consumption
indirect tax after almost ten years of debate at 3%. Reform
was necessary for between 1975 and 1984, the tax burden
rose sharply in Japan with central government taxes up by
4.1% and local taxes by 2.7% taxes. The dissatisfactions
could be categorized in the difference in tax burden among
taxpayers in which the tax ratio was "ku-ro-yon", 9-6-4 ratio
among workers, self-employed and farmers. Mismatch
between the wage system and income tax structure in which
the wages rose with seniority and taxes also increased
steeply where the middle class need it the most with the
children’s education or for a residence. Therefore the
progressiveness of the income tax for middle-class salaried
workers is too high. The unfairness in taxation on capital
income, as mentioned above is major source of savings and
investment but also is a source of inequitable tax system and
behind the massive account surpluses. The heavy corporate
tax burden which has risked dramatically since the 1970s
have caused much complaint. The outdated indirect taxes
which pose no tax on service is a failure to reflect the
changing consumption patterns. The standard procedure for
the tax reform is to reduce marginal tax rates by broadening
the tax base with the introduction of indirect consumption
taxes. It is also a cheaper and more effective way to
stimulate savings for consumption tax does not tax savings
instead of using special tax incentives. The reform is also
necessary in view of the aging population and its need for
larger social security . Tax preferences for expenses and
depreciation allowance should be reduced to reduce the loss
in tax revenue. A comprehensive tax system will not only will
achieve what Shops Mission’s real goal of tax equity but also
ensure the future mature growth of Japan for with a large
deficit, the previous tax provisions and incentives can no
longer be continued. Japan’s tax system is still midway
between a comprehensive income tax and an expenditure
tax. Change is necessary, but the role of government and
taxation still pose many hard decisions to politicians.
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