The Japanese Tax System

The Japanese Tax System

The Japanese Tax System

The Japanese Tax System


'Should be of immense value to economic historians and public finance specialists... The bibliography is also impressive.' -Asia Pacific Business Review'This book remains the definitive study of Japan's tax policy today and of the history behind it.' -Contemporary ReviewThis book provides English-speakers with a comprehensive description and incisive critique of the Japanese tax system. The third edition explores the Japanese government's latest round of tax reforms - a reaction to the country's prolonged period of recession following the collapse of the 'bubble' phenomenon in 1991. Two brand new chapters discuss the effect of environmental taxes and land tax reform, and much of the original data and empirical material has been updated.


The purpose of this chapter is to provide a brief overview of the tax system in Japan. in general, a tax system presents certain significant features which have a close bearing on the workings of the economy in which it operates. What, then, are the general characteristics of the Japanese system? To answer this question, three important areas must be covered before beginning to consider major issues.

First, a brief description is given of the evolution of the prewar and postwar tax systems. Second, three main features in tax levels and structure are explored. Lastly, several notable aspects of tax process and administration are examined as a preliminary step for further analysis.

Historical Background

Modernizing the Tax System

The origin of a modern tax system in Japan can be dated to 1887, when the national government instituted an income tax. Although this took a truly modern form only in 1940, Japan is thus counted as a pioneer in the use of the income tax. However, since the Japanese economy was at that time still underdeveloped, the income tax played only a minor role in total national tax revenues (say, 1.5 per cent in 1888).

Before the income tax became predominant in the tax system as a whole, the main revenues for the national government were raised first from a land tax, and then from indirect taxes. in fact, the land tax accounted for the largest share of national taxes until 1908, after which time the primary source was revenues from indirect taxes, mainly on alcoholic beverages and tobacco. Only after 1935 did income tax on individuals and corporations became the most important single source of total revenues. in short, before the Second World War the Japanese government relied mainly on indirect taxes, deriving more than two-thirds of its total revenue from them.

In 1940 an overall tax reform was carried out to prepare for the wartime economy. the whole tax system was thoroughly overhauled, resulting in the modern tax system, based mainly on direct taxes. Although individual and corporate incomes had been taxed together by a single form of income tax, in 1940 separate taxes were imposed for each type of income. Since then, individual and corporate income taxes have coexisted in the tax system.

The individual income tax was a schedular tax, under which different sources of income were levied by different tax rates. It was supplemented by a progressive

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