Japanese Fiscal System - What did we choose by choosing VAT? -

Dr Jun Iritani, (Visiting Scholar, Faculty of Economics and Politics, Wolfson College)

Saturday, 21 April, 2001; 7:30-9:30pm

Bowett Room, Queens' College

In 1989, major changes were made to the Japanese tax system including the introduction of value-added tax (VAT) and the lowering of the progressivity of income tax. These changes can be viewed as an attempt by the Japanese government to solve three problems. Firstly, Japan was burdened with a large national debt. Secondly, there was a problem with the tax system itself, whereby it was believed that Japanese tax revenue depended heavily on the withholding tax (i.e. income tax levied on workers). In contrast to the amount workers paid, however, owner operators and farmers paid far less income tax. This was known as the so-called 'Kuroyon (964)' problem. Finally, it was recognized that new sources of tax revenue were required if the government was to meet increased demands in expenditure due to Japan's ageing society. Despite the changes made, the problems are still intact today. In fact, they have become even more serious as a result of the depression, which has seen the Japanese economy, one of the world's most powerful, become one of the developed world's most problem-ridden. Currently, Japan faces a four-fold impasse. This report will assess the Japanese fiscal system with reference to economic theory. The Japanese VAT system will also be evaluated.