The Japanese government is facing the same economic shortfalls as their US counterparts.
- A debate rages among advisers to the ruling party concerning the nature of reforms in Japan's tax regime. Unfortunately, some loud and influential voices propose the creation of new taxes or increasing the levies on income, consumption and corporate assets.
- Phasing out tax cuts could be part of the tax revisions for fiscal 2005 and reflect a frantic search to raise tax revenue to help sort out Tokyo's debt-ridden finances. Another reason is to allow the state contribution to the national pension program to be raised from the current one-third to 50 percent by fiscal 2009.
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Implementing these proposals would increase the overall tax burden and dampen economic activity by reducing business investments and household savings. Consider that Japan's economy recorded slow or no growth after capital-gains tax rate rose from 0% to 20% in 1990, and a national sales tax implemented in 1989 was increased during the late-1990s.
By contrast, data from Holland and Ireland as well as the US and the UK indicate that reducing the tax burden can boost growth and cause beneficial changes in the structure of the economy. In all events, high rates induce evasion and avoidance that make it harder to meet revenue targets.
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