Taxation in Japan Essay Example For Students

Taxation in Japan Essay The role of taxation in the transformation of the JapaneseEconomy Introduction Before the Meiji restoration under thefeudal Tokugawa Shogunate, taxation was mainly a tool forwarfare and military power. The system was highlyregressive and pressed lightly on the rich and profit-earners. It was calculated to preserve a very unequal distribution onincomes and to stimulate the accumulation of private capital. This tendency somehow continued and was magnified beforeW.W.II when direct taxation was introduced for a moreequal and balanced system. However, the Meiji restorationdid bring with it tremendous changes to the tax system andthe use of the revenues. The Japanese government has sincehad an active participation in the economy, yet notcontrolling it directly but rather through market mechanisms. We will write a custom essay on Taxation in Japan specifically for you for only $16.38 $13.9/page Order now It took responsibility for promoting economic growth byusing incentives and taxes collected in an effective way. Theoften cited goal of taxation in western countries that wasequality was often sacrificed for the goal of economic growthin order to prevent being colonized, then to pursuit the desireto become an imperialist nation and then for pride andexport. The role of government and its fiscal policies playedan important role in the transformation of the Japaneseeconomy through the periods of Meiji restoration, beforeW.W.II and post W.W.II period where taxes respectivelyshifted from land taxes to internal indirect taxes to income /direct taxes. (Fig 1) Period of Meiji Restoration During thefirst years of the Meiji reforms, the government had seriousfinancial difficulties with tax revenues inadequate for itsmassive commitments. In 1873, land reforms gave tittles tolandowners and customary tenants, freed the transfer andsale of land from feudal restrictions and imposed taxobligations equal to 3 per cent (which was lowered to 2.5%in 1878) of the value of land. In addition a 30% local surtaxwas imposed on the land taxes. These heavy land taxes wereused to provide monetary compensations to the old rulingclass for the termination of their feudal incomes in kind andto finance the new administration which introduced neweducation and to support its military. The agricultural sector,and in fact the peasants, therefore bore the great bulk of thecost to Japans modernization. The land taxes contributed toover 70% of the central governments revenue during the firstdecade of the Restoration. Since the capital needs ofagriculture were small even after the landlords devotion tothe improvement of agricultural techniques and introductionof winter drainage, the increasing savings and surplus oflandlords were transferred out of the primary sector intoother sectors. The fiscal system as a whole was heavy inabsolute terms yet highly regressive. The burden wasconstantly on the agricu lture sector, even whennon-agricultural sectors were growing at a phenomenal rate. As seen in Figure 1, under indirect taxes, before the turn ofthe century, the excise taxes played a prominent yet secondto land taxes at about 20% of the governments totalrevenue. These included taxes on soya, sugar, textiles andgovernment monopoly profits in tobacco, camphor and salt. The combined effect of the land taxes and consumptiontaxes was heavy taxes on both peasant and consumer and alighter burden for the landlord and industrial-merchantclasses. The income tax did not appear until 1887 and thebusiness tax which was the corporate tax did not come intoeffect until 1896 and at a low flat rate of 3%. The result wasthe subsidizing of the manufacturing and service sector at theexpense of the primary sector. To strengthen the incentivesfor reinvestment and accumulation of productive wealth wasstrengthened by the absence of inheritance and real estatetaxes before 1905 and a relatively low rate thereafter. Therole of the family and the firm that existed also as a closelybound unit also made the saving, transferring form generationto generation and development favorable. Therefore, theZaibatsus, the conglomerate oligopolies could chargemonopoly prices and concentrate on exports. At this time,between the 1870-1900, there was the traditional exportexpansion of silk a nd other produces, coupled with mildprimary import substitution. Tariffs and revenue on foreigntrade were also low at the time due to the fact that theJapanese government was under the influence of foreigncountries and autonomy of tariffs was not until 1899. However, this tradition had little change even after thegradual regaining of autonomy. This was a very differentfrom the path followed by other developing countries whichusually place heavy taxes on trade because they are thesimplest and easiest form of taxation. Japan, by not followingthe easy path and concentrating on export substitution andland taxes for internal revenue creating a thriving export ofprimary goods before the 1920s. Period before W.W.II Theera of the land taxes ended in 1908 and was followed byindirect taxes, mainly on alcoholic beverages and tobacco. Itwas not until 1935 that income taxes on individuals andcorporations became the most important source of totalrevenues. The modern tax form only took form in the 1940to prepare for the wartime economy, the whole tax systemwas thoroughly overhauled to base on direct taxes. Theindividual tax was a scheduler tax, under which differentsources of income were levied by different tax rates. It wassupplemented by a progressiv e comprehensive tax whichapplied to an individuals aggregated income above a specificamount. On the other hand, the corporate income tax wasimposed on corporate income at a flat rate of 18%. Thecommodity tax was introduced in 1937 mainly to collectrevenue for wartime expenses, and the tax on alcoholicbeverage was also simplified in 1940. The relative share ofindirect taxes fell as a result of the tax reforms. The 1940reform also separated the personal income tax fromcorporate income tax. This period saw the rise of the powerof the military in the government and influence after thewinning wars of the Sino-Japaneses and Russia-Japaneseearlier in the century and the ailing and corruption of thecivilian government. The government was engaged incontinuous military activities and was penalized withincreased tariffs. However, due to expansion of its ownempire and influence which included Taiwan and Korea,export suffered little and actually had a 70% increase involume between 1929 and 1937. This period also sawheavy taxes and direct investment of government in industriesresulting in rapid growth of war related industries. Thisperiod ended with the GNP declining from 1939 and 1944. The tax system became the tool for direct financing in thisperiod. The military drove the economy and accounted for27.98% of GNP by the second world war which could besaid as the grand continuation of the feudal TokugawaShogunate military expansion policies. Post W.W.II With theoccupation forces lead by the United States taking over thegovernment, reforms were held on all aspects of thegovernment. Immediately after the war, the scheduler tax onindividual income was replaced by a unified tax on anaggregate basis with graduated tax rates. In order to collectnecessary revenues, a 1% turnover tax was levied on thebasis of the sales amount at every stage of transaction. Asfor the long term tax system design, it was also based on theUS system but was also an experimental ground for theShoup Mission which was a pioneer in many aspects of thedirect tax. The Shoup reform in 1949 was not the firstreform after the war to the chaotic after-war tax system, butit has had the most lasting effect on the development of theJapanese economy. The Shops Report tried to build aprogressive direct tax based tax system with local autonomyand simplicity that would be permanent and stable. Indirecttaxes were not recommended due to the inequality amongthe tax payers, dull the sense of civic responsibility and makelocal governments uneasy. However, the Japanesegovernment regained autonomy during the Korean war andmade modifications such as the resuming taxation at thenational level and sacrificing equity which Shops put at theutmost priority for convenience of efficiency andadministration. The burden on firms, especially big businesswas lowered. This was to give priority to the restoration ofthe postwar economy and the promotion of capitalaccumulation. Capital gains tax was abolished, under themissions guidelines and this had a effect of the promotion ofcapital accumulation as a national goal. Although partiallysuccessful, the Shoup plan broke away from the militaryroots of the Japanese ta x system and engaged in aresponsive tax system which was in touch with the economy. The four major taxes, income, corporate, accession andconsumption taxes all varied to different degrees from theShops Mission. However, the four taxes have beenremarkably stable in structure since 1950. The global incometax system proposed by Shops was modified to acombination of a comprehensive tax and a scheduler tax. .u4c1864ddaa89cc6cd0cc764d7d00c7da , .u4c1864ddaa89cc6cd0cc764d7d00c7da .postImageUrl , .u4c1864ddaa89cc6cd0cc764d7d00c7da .centered-text-area { min-height: 80px; position: relative; } .u4c1864ddaa89cc6cd0cc764d7d00c7da , .u4c1864ddaa89cc6cd0cc764d7d00c7da:hover , .u4c1864ddaa89cc6cd0cc764d7d00c7da:visited , .u4c1864ddaa89cc6cd0cc764d7d00c7da:active { border:0!important; } .u4c1864ddaa89cc6cd0cc764d7d00c7da .clearfix:after { content: ""; display: table; clear: both; } .u4c1864ddaa89cc6cd0cc764d7d00c7da { display: block; transition: background-color 250ms; webkit-transition: background-color 250ms; width: 100%; opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; background-color: #95A5A6; } .u4c1864ddaa89cc6cd0cc764d7d00c7da:active , .u4c1864ddaa89cc6cd0cc764d7d00c7da:hover { opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; background-color: #2C3E50; } .u4c1864ddaa89cc6cd0cc764d7d00c7da .centered-text-area { width: 100%; position: relative ; } .u4c1864ddaa89cc6cd0cc764d7d00c7da .ctaText { border-bottom: 0 solid #fff; color: #2980B9; font-size: 16px; font-weight: bold; margin: 0; padding: 0; text-decoration: underline; } .u4c1864ddaa89cc6cd0cc764d7d00c7da .postTitle { color: #FFFFFF; font-size: 16px; font-weight: 600; margin: 0; padding: 0; width: 100%; } .u4c1864ddaa89cc6cd0cc764d7d00c7da .ctaButton { background-color: #7F8C8D!important; color: #2980B9; border: none; border-radius: 3px; box-shadow: none; font-size: 14px; font-weight: bold; line-height: 26px; moz-border-radius: 3px; text-align: center; text-decoration: none; text-shadow: none; width: 80px; min-height: 80px; background: url(https://artscolumbia.org/wp-content/plugins/intelly-related-posts/assets/images/simple-arrow.png)no-repeat; position: absolute; right: 0; top: 0; } .u4c1864ddaa89cc6cd0cc764d7d00c7da:hover .ctaButton { background-color: #34495E!important; } .u4c1864ddaa89cc6cd0cc764d7d00c7da .centered-text { display: table; height: 80px; padding-left : 18px; top: 0; } .u4c1864ddaa89cc6cd0cc764d7d00c7da .u4c1864ddaa89cc6cd0cc764d7d00c7da-content { display: table-cell; margin: 0; padding: 0; padding-right: 108px; position: relative; vertical-align: middle; width: 100%; } .u4c1864ddaa89cc6cd0cc764d7d00c7da:after { content: ""; display: block; clear: both; } READ: Hiv therepy EssayInstead of aggregating most incomes with progressive taxrates, some incomes such as capital gains or interest incomewere now subject to income taxation or were taxed atreduced flat rates, separate from other incomes. These taxconcessions were intended to stimulate savings and incomeand to improve the welfare level among specific taxpayers. As for corporate income taxes, a split-rate system ratherthan a uniform one in which a single rate is imposed on awhole corporate income. This was similar to the one used inWest Germany in which retained profits and dividends weretaxed at different rates. Numerous tax measures have madethe corporate income tax extraordinarily complicated. As forthe accession tax on transfer of wealth proposed by ShopsMission was replaced by a combination of inheritance andgift taxes. Consumption taxes, in contrast to the generalmodification of direct taxes remained unchanged since theShops Mission and there has been no general consumptiontax in Japan until April 1989. Therefore, Japan depends itsrevenue from taxes on income and corporate income taxes,which is the highest among OECD countries. Social securitycontributions which are equivalent to payroll taxes also playan equally important role in the raising of taxes. Japan is alsothe only advanced country that does not impose a generalconsumption tax . In 1985, of the total tax revenues collectedin Japan, 45.8% came from individuals and corporateincome taxes, 30.2% from social security contributions, 14%from taxes on goods and services, 8.6% from property taxand 1.1% from inheritance and gift taxes. Before the 1973oil shock, the government engaged in a tax system withincentives to promote exports, private savings andinvestment, housing and technological development topromote economic growth. These measures were included inthe Special Tax Measures Law and was formulated toprepare a list of most of the incentive provisions applyingmainly to individual and corporate income taxes. As seen inFigure 2 and Table 1, the corporate revenue lost to thesespecial tax measures but declined in importance after the mid-1970s. The special tax measures was around 12.6 and13.2% of total income tax revenues in the late 1950s fell to8-9% in 1961-1962 then rose to 12% in 1965 and thengradually declined to 5.0% in the early 1980s. The specialmeasures could be classified into tax exemptions and creditsand tax deferrals like accelerated depreciation and tax-freereserves. These exemptions targeted specific industries suchas steel and machinery and also developing technologicalinnovation. The six main objectives of the tax incentives areoutlined the Ministry of Finance (MOF) as promotion ofsaving; promotion of environmental quality and regionaldevelopment, promotion of natural resources, promotion oftechnological development and modernization of industrialequipment, strengthening of the financial position of firms andother incentives. As seen in Table 2, the greatest decline inimportance is promotion of export and foreign investmentwhich included special deductions of export income fromtaxation and accelerated depreciation for export orientatedfirms. However, this is still an understatement of themagnitude of tax incentives due to hidden incentives that arenot included by the MOF in special tax incentives. Firstly,there is the provi sion for capital gains, interest and dividendsas part of the basic income tax law. Second, thefractionation of individual income tax into separate classifiedtaxes loses a great deal of revenue and greatly reduces theprogressivity of the nominal rate structure, particularly at thetop brackets. Third, business expenses as specialdepreciation accounting and deduction for part of social andentertainment expenses are also not included. Fourth,housing subsidy and low interest loans to executives are notregarded as special tax measure. Fifth, the official estimate ofrevenue is constantly low, so therefore, the special taxmeasures are estimated low. Another feature of the Japanesegrowth economy was the annual tax-cutting policy due to thefact that GNP rose by an average of 15% a year between1950 and 1960. The reason for the annual cuts were due tothe fact that Japan had a highly elastic income tax reaching2.0 in the 1960s meaning that for every 10% growth in GDPthat would be a 20% growth in revenue. The Japanesegovernment did not use the money in the expansion ofgovernment or counter-cyclical to obtain stable growth. Social welfare was also limited for the insistence oninvestment into growth and export. The tax cutting policy isto keep the revenues to national income constant at around20%. This was maintained between 1955 to 1965. This wastargeted at the individual income tax while both corporateincome tax and indirect taxes showed varying changes overtime. Corporate taxes increased much more frequently whileindirect taxes were raised to adjusted for the rise incommodity prices. The result of the tax cutting and keeping alid on the growth of the public sector coupled by the lowestexpense on defense in the developed country was the lowesttax rates in the developed country. Therefore, this permittedthe rapid increase in private demand. As mentioned above,the tax system stresses simplicity instead of equity with theresult of benefiting business and professionals rather than theemployee. First, the Shops Mission suggested the bluereturn system which is a self-assessment income tax forsmall to medium size businesses. The benefits of the bluereturn include basic deduction for blue return, specialdeductions for wages of family members working in thesame company, and special tax-tree reserves for employeesretirements, allowance for bad debt etc. These specialtreatments reduce the tax burden of the family small businessfirms. Secondly, there is the issue of withholding tax systemfor wage and salary incomes. More than 80% of individualincome tax is withheld at the source. Although withholding isapplied to interest, dividend, and other income, the largestportion of withheld taxes relate to employment income. Asseen in Figure 3, the income of salary earners is almost fullyidentified by tax authorities while self-employed and farmershave much an advantage in taxable income. This is oftenreferred as the ku-ro-yon, 9-6-4 ratio of salaried workers,self-employed and farmers. The third issue is the anonymousand fictitious accounts. Banks accounts could be openedwith seals rather than signatu res and banks make no attemptto identify the seals. By creating a number of these tax-freetreatments, the wealthy was able to abuse the system. Therefore, although the tax system structure was notprominently regressive, the legislative side make thewage-earners pay a higher price of taxation for the reason ofsimplicity to businesses as proposed by the government. TaxStructure and Economic Development In the period sincethe Meiji Restoration, there has been government transferand tax incentive from the peasant and wage earners tobusiness to stimulate growth. Japan has had phenomenalgrowth in the past hundred years, however, the question isthat if there is a direct relationship between tax structure andeconomic development. In Table 3, y/N stands for percapita real GNP with N as the total population, Ag/Y is theagricultural products share in GNP with Ag as the output ofthe primary sector, M/Y or (M+X)/Y as the openness of theeconomy where M and X stand for import and exportrespectively. As seen in Table 3, there is a significantcorrelation between y/N, Ag/Y and T/Y between1885-1944. Before the war, the agriculture sector still played an important role in taxation structure. This is oftenreferred to as the dual sector and where the taxes in the formof land taxes were charged heavily in taxation. There is alsono correlation between the postwar period of 1951-86 buty/N and T/Y are still significantly related. As from1951-1986, openness provides a better index than the othertwo variables mentioned 25 years before the prewar period,and it becomes even more significant in explaining T/Y forthe postwar period. Therefore, there is a correlationbetween the openness of the economy, which is imports andexports and the taxation structure. However, one couldemphasize the passive nature of the evolving tax system , inwhich one could even say that the major determinant of taxstructure change is the structural change in the economy itselfduring the process of economic development. When weconsider Table 4, where Tl is land taxes, Ti is indirect taxes,and Ty income taxes on individual and corporate income. Itshows the rela tionship (R2)that land taxes made up theprincipal shares revenue in 1885-1898 while indirect taxesmade up 1899-1935 and incomes taxes from 1936-86. Thisproves the time division as mentioned above. However,more importantly, as y/N increases, Tl/Tn and Ti/Tndecreases. The relative importance of land and indirect taxesfaded when growth increased. As for the openness (M/Y or(M+X)/Y) can be explained from the opposite signs in Ti/Tnbefore and after the war (3.101 to -1.808). The negativecorrelation after the war showed that openness was nolonger effective in increasing the indirect tax base at this levelof economic development and that the declining importanceof indirect taxes happen to have a close bearing with theopenness in a growing economy. That leaves us with Ty/Tndominantly affected by y/N, with the relative share of incometaxes rising in the course of development. The supply-sidepoint of view emphasizes the link between savings andinvestment with I=S+(T-G) with net export as zero . As taxesrevenue were greater than government expenditures before1975, investment from saving could be maximized. With netexports as positive, it would also help on investment in thecountry. As seen in Table 5, there was constant governmentsurplus before 1975. Therefore, it was only 1975, that thegovernment could continue the role using taxes to promoteinvestment and growth. As deficit grew, it would eat into thesavings and therefore investment. This was also thetax-cutting policy which was before 1975 to prevent theoverburden of the tax payer with their high elasticity ofpersonal tax revenue. The growth can be shown using theformula k=sx-(n+d)k which means for an increase in capitalstock savings has to be larger than depreciation. TheJapanese government promoted savings through tax cuts andtax incentives and also allowed increased depreciation undertax laws more rapid growth. Studies of the impact of thespecial tax measures on Japanese economic growth are, forthe most part, inconc lusive. There is virtually no relationbetween the special tax measure to promote householdsavings and the rate of private savings. Many of the specialtax measure were used in industries that were not regardedas strategic from the standpoint of growth, such as the textileindustry which received favorable treatment but grewrelatively slowly. As mentioned above, though, the initialdepreciation allowances were used widely for expansion andmodernization in such strategic industries as steel andmachinery. Therefore, except for the stimulus in theseindustries, the special tax measure did not have a substantialeffect on investment and growth. Although the tax systemand its effect on the economy is inconclusive, tax system mayaffect economic activity in several ways. First, fro businessand managerial incentives, the regular salary earners with taxwithholding has a fully taxable income. As for the businessinnovator and risk taker, the rewards are scarcely taxed bythe tax system which permits the tax-free accumulation ofcapital gains and requires only modest tax payments on otherproperty incomes. As for management incentive, the typicalmanager obtains his satisfaction through prestige of job,expense of account which is often easily deductible under taxlaws. Implicit tax exemption fro unrealized capital gainsderived from undistributed corporate earnings permit themanager to accumulate large amount of corporate wealth. .u0be6085db65ddc9f514bf539b4d2cfb1 , .u0be6085db65ddc9f514bf539b4d2cfb1 .postImageUrl , .u0be6085db65ddc9f514bf539b4d2cfb1 .centered-text-area { min-height: 80px; position: relative; } .u0be6085db65ddc9f514bf539b4d2cfb1 , .u0be6085db65ddc9f514bf539b4d2cfb1:hover , .u0be6085db65ddc9f514bf539b4d2cfb1:visited , .u0be6085db65ddc9f514bf539b4d2cfb1:active { border:0!important; } .u0be6085db65ddc9f514bf539b4d2cfb1 .clearfix:after { content: ""; display: table; clear: both; } .u0be6085db65ddc9f514bf539b4d2cfb1 { display: block; transition: background-color 250ms; webkit-transition: background-color 250ms; width: 100%; opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; background-color: #95A5A6; } .u0be6085db65ddc9f514bf539b4d2cfb1:active , .u0be6085db65ddc9f514bf539b4d2cfb1:hover { opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; background-color: #2C3E50; } .u0be6085db65ddc9f514bf539b4d2cfb1 .centered-text-area { width: 100%; position: relative ; } .u0be6085db65ddc9f514bf539b4d2cfb1 .ctaText { border-bottom: 0 solid #fff; color: #2980B9; font-size: 16px; font-weight: bold; margin: 0; padding: 0; text-decoration: underline; } .u0be6085db65ddc9f514bf539b4d2cfb1 .postTitle { color: #FFFFFF; font-size: 16px; font-weight: 600; margin: 0; padding: 0; width: 100%; } .u0be6085db65ddc9f514bf539b4d2cfb1 .ctaButton { background-color: #7F8C8D!important; color: #2980B9; border: none; border-radius: 3px; box-shadow: none; font-size: 14px; font-weight: bold; line-height: 26px; moz-border-radius: 3px; text-align: center; text-decoration: none; text-shadow: none; width: 80px; min-height: 80px; background: url(https://artscolumbia.org/wp-content/plugins/intelly-related-posts/assets/images/simple-arrow.png)no-repeat; position: absolute; right: 0; top: 0; } .u0be6085db65ddc9f514bf539b4d2cfb1:hover .ctaButton { background-color: #34495E!important; } .u0be6085db65ddc9f514bf539b4d2cfb1 .centered-text { display: table; height: 80px; padding-left : 18px; top: 0; } .u0be6085db65ddc9f514bf539b4d2cfb1 .u0be6085db65ddc9f514bf539b4d2cfb1-content { display: table-cell; margin: 0; padding: 0; padding-right: 108px; position: relative; vertical-align: middle; width: 100%; } .u0be6085db65ddc9f514bf539b4d2cfb1:after { content: ""; display: block; clear: both; } READ: Police Brutality EssaySecond, the effect on economic stability, Japan with its highelasticity on income taxation could be used for the stabilizingeffect of the economy to cushion the economic bumps. However, the Japanese government has reduced the tax rateand used monetary policy for short-run stabilization. As forthe effects on saving and investment, gross savings increasedfrom about 25% of GNP in the mid-1950s to about 40% inthe 1970s. Increase of the stock of capital is important forgrowth because it raises productivity directly and permits theadoption of newer and more efficient technologies. Thenational budget with its surpluses added to the nationalsaving and helped to provide the margin of resources neededfor the production of large and growing volume of investmentgood. Government savings also averaged above 40% ofprivate savings even with the annual tax reductions. This wasdue to the systematic underestimation of tax revenues. Thepolicies to promote private investment such as accelerateddepreciation makes bankers more willing to make loans. Therefore, the tax incentives made have had an indirecteffect on investment and growth. Finally, the simple fact thatthe low tax rate in Japan may be the prevailing explanationfor the high rate of private saving and investment in Japan. Other Determinants of Tax Structure Development andGrowth The military factor before W.W.II and after wasreduced drastically to less than 1 % of GNP. Before theW.W.II the figure was around 28% of GNP. This is low ininternational comparisons of military expenses-GNP ratiowhere it is 6.3% in the USA. Japan has a low level ofwelfare commitments. The average transfer payments tonational income in 1961-1970 in various countries was20.8% in France, 7% in USA with 5% in Japan. By 1984,the US ratio grew to 15.1% while France went up to35.2%, in comparison with Japans 14%. Another factor isthe savings in Japanese thriftiness. Even at high directtaxation on the wage earner, the average saving rate was stillbetween 25% and 40% GNP. This started since the MeijiRestoration with moral suasion from the government withslogans like Let us avoid all luxuries so that we keep upwith the world; truly the development of our nationalproductive strength has its roots in reverent obedience. Thiswas coupled w ith the favorable inheritance tax laws andcapital gains law that made accumulation of wealth feasibleand worthwhile to the family centered Japanese worker. Future of Tax System in Japan As seen in Table 5, hugedeficits arose since 1975 from the first oil shock andaccelerated due to the second one and amounted to 4.4 %of the GNP in 1979. This has caused more alarm comparedwith other countries with similar levels of debt. Thegovernment was no longer able to cut taxes on personaltaxes and government incentive programs because of theirlarge losses in tax revenue were cut (Table 1). On top of theeconomic repercussions, the original tax system wasrepressive and unjust for the stress on simplicity. In 1989,the Value Added Tax (VAT) was added as the consumptionindirect tax after almost ten years of debate at 3%. Reformwas necessary for between 1975 and 1984, the tax burdenrose sharply in Japan with central government taxes up by4.1% and local taxes by 2.7% taxes. The dissatisfactionscould be categorized in the difference in tax burden amongtaxpayers in which the tax ratio was ku-ro-yon, 9-6-4 ratioamong workers, self-employed and farmers. Misma tchbetween the wage system and income tax structure in whichthe wages rose with seniority and taxes also increasedsteeply where the middle class need it the most with thechildrens education or for a residence. Therefore theprogressiveness of the income tax for middle-class salariedworkers is too high. The unfairness in taxation on capitalincome, as mentioned above is major source of savings andinvestment but also is a source of inequitable tax system andbehind the massive account surpluses. The heavy corporatetax burden which has risked dramatically since the 1970shave caused much complaint. The outdated indirect taxeswhich pose no tax on service is a failure to reflect thechanging consumption patterns. The standard procedure forthe tax reform is to reduce marginal tax rates by broadeningthe tax base with the introduction of indirect consumptiontaxes. It is also a cheaper and more effective way tostimulate savings for consumption tax does not tax savingsinstead of using special tax incentives. The reform is alsonecessary in view of the aging population and its need forlarger social security . Tax preferences for expenses anddepreciation allowance should be reduced to reduce the lossin tax revenue. A comprehensive tax system will not only willachieve what Shops Missions real goal of tax equity but alsoensure the future mature growth of Japan for with a largedeficit, the previous tax provisions and incentives can nolonger be continued. Japans tax system is still midwaybetween a comprehensive income tax and an expendituretax. Change is necessary, but the role of government andtaxation still pose many hard decisions to politicians. Bibliography 1.Ito Takatoshi., Tax Reform in Japan, ThePolitical Economy of Tax Reform, The Univeristy of ChicagoPress,1992 2.Ranis G., The Financing of JapaneseDevelopment, Economic History Review April 1959 3.AllenG.C., A Short Economic History of Modern Japan , 19624.Patrick H. and Rosovsky Henry., Taxation, Asias NewGiant, 1976 5.Ishi Hiromitsu., Ch 1-3, The Japanese TaxSystem, Clarendon Press 1989 6.Ohkawa K. Ranis G.,Economic Development in Historical Perspective, Japan andthe Developing Countries A Comparative Analysis., BasilBlackwell, 1985 7.Dornbusch R.,. Macroeconomics 3rdCanadian Edition, McGraw-Hill, 1987 8.Shiraishi Takashi,Japans Trade Policies 1945 to the Present Day, AthlonePress, 1989. History