The Tax System in Japan

Abstract

Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format ECO/WKP(2000)4 2 ABSTRACT/RÉSUMÉ The Japanese tax system applies relatively low marginal tax rates on most economic activities which, in combination with moderate tax elasticities of the bases, indicate that the overall distortion from the tax system (the excess burden) is probably modest compared with other OECD countries. Recent sizeable reductions in statutory marginal tax rates in both the personal and the corporate tax system have strengthened this feature. However, significant loopholes and non-neutralities are in place in key parts of the tax system, leading to potentially substantial efficiency losses once the tax-to-GDP ratio starts rising to accommodate the restoration of public finances as well as the expenditure needs related to the ageing population. There is thus an immediate need to start broadening the tax base in major parts of the system, including reducing the vast allowances and credits in the personal income tax system; incorporating bonuses in the base for social security contributions; increasing the effective taxation of pensions. Furthermore, the effective taxation of the self-employed could be strengthened by stepping up enforcement and by shifting the base for taxation from income to value added. Property taxes, in particular the inheritance tax, distort prices on property and land and should be made more neutral through base broadening and changes in the rate structure. Another main concern is the non-neutrality caused by differential treatment in the corporate tax system of different investment and financing sources, implying an excessive reliance on debt financing in the corporate sector. With respect to tax administration, this could benefit from the introduction of a taxpayer identification number system. Such a system is applied in most other OECD countries. Finally, local government finances would be stabilised by a shift in the base of local corporate taxation to a value added type tax.