Annual Report on the Japanese

Economy and Public Finance


- No Gains without Reforms II -

November 2002

Cabinet Office

Government of Japan

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Chapter 2

   The Tax System Reform for Vitalizing the Economy

   Amid the dwindling birthrate and an aging population, diversification of life style, globalization, and computerization of society, the Japan' s economy has long been mired in recession. Meanwhile, Japanese public finance is based on an extremely inadequate revenue structure that produces a huge revenue-expenditure gap(1). In order for the Japan' s economy to get out of the prolonged recession and regain revitalize, it is essential to promote structural reforms, including institutional reform in a wide-range of fields. As part of such efforts, a comprehensive, drastic reform of the tax system, which is the basis of the economy and society, is being called for.
   With regard to tax system reform, the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002 (hereinafter to be called 'Basic Policies 2002' )" that was adopted by the Cabinet on June 25, 2002 says; "In order to revitalize the Japan' s economy and ensure high-quality employment in Japan amid the dwindling birthrate and an aging population, IT revolution, and intensifying international competition, it is essential to extensively review the tax system, the basis of the economy and society."
   In order to design new taxes that support the economic vitality and to move toward tax reform, it is essential to examine the tax burden structure(2).
   From this standpoint, the actual status of the tax burden with regard to individual income tax and corporate income tax will be examined comprehensively and from various angles in this Chapter. Section 1 deals with the burden structure of individual income tax. In this section, analyses will be made on the burden structure by income bracket, tax burden by generation and through the life-cycle, and the present state of deductions that affect the tax burden. Section 2 deals with corporate income tax and makes international comparison of the burden structure. Since the impact of corporate income tax through inter-industrial relationship is important, the section also analyzes the impact by carrying out simulation of the impact of corporate income tax using an applied general-equilibrium model(3).

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