Public Economy, Part 2

Abstract

Abstract This chapter takes up all aspects of Japanese taxes, including Japanese government debt which amounts to the shifting of taxes through time. The first part discusses the structure of taxes from the Meiji period through the first half of the twentieth century, which resembled that of developing countries of today. It then describes the current tax system of Japan which evolved from the tax system adopted in 1950 under the American occupation. It comprises personal and corporate income taxes, consumption and excise taxes, wage taxes, inheritance taxes and customs duties. The discussion then turns toward tax incidence and tax shifting, tax burden, and excess burden. Assuming that all taxes are shifted onto labor, it suggests that Japan’s total tax revenue of 30% of GDP imposes an excess burden of about 2% of GDP. Tax reform aimed at broadening the tax base and lowering the marginal tax rates, would lower the excess burden. The final part of the chapter is devoted to Japanese government debt. First is the question of how to measure it. The correct measure is net debt, which subtracts from gross debt the government debt held within the government itself including the BOJ. The trajectory of government debt that is consonant with minimum excess tax burden, given the stream of government spending, entails tax smoothing. Given this logic, one should ask whether taxes are too low, not whether government debt is too high. Japanese taxes are almost high enough to be judged sustainable.