Taxation in Japan

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The role of taxation in the transformation of the Japanese
Economy Introduction Before the Meiji restoration under the
feudal Tokugawa Shogunate, taxation was mainly a tool for
warfare and military power. The system was highly
regressive and pressed lightly on the rich and profit-earners. It was calculated to preserve a very unequal distribution on incomes and to stimulate the accumulation of private capital. This tendency somehow continued and was magnified before

W.W.II when direct taxation was introduced for a more
equal and balanced system. However, the Meiji restoration
did bring with it tremendous changes to the tax system and
the use of the revenues. The Japanese government has since
had an active participation in the economy, yet not
controlling it directly but rather through market mechanisms. It took responsibility for promoting economic growth by
using incentives and taxes collected in an effective way. The often cited goal of taxation in western countries that was
equality was often sacrificed for the goal of economic growth in order to prevent being colonized, then to pursuit the desire to become an imperialist nation and then for pride and
export. The role of government and its fiscal policies played an important role in the transformation of the Japanese
economy through the periods of Meiji restoration, before
W.W.II and post W.W.II period where taxes respectively
shifted from land taxes to internal indirect taxes to income / direct taxes. (Fig 1) Period of Meiji Restoration During the first years of the Meiji reforms, the government had serious financial difficulties with tax revenues inadequate for its

massive commitments. In 1873, land reforms gave tittles to
landowners and customary tenants, freed the transfer and
sale of land from feudal restrictions and imposed tax
obligations equal to 3 per cent (which was lowered to 2.5%
in 1878) of the value of land. In addition a 30% local surtax was imposed on the land taxes. These heavy land taxes were
used to provide monetary compensations to the old ruling
class for the termination of their feudal incomes in kind and to finance the new administration which introduced new
education and to support its military. The agricultural sector, and in fact the peasants, therefore bore the great bulk of the cost to Japan's modernization. The land taxes contributed to over 70% of the central government's revenue during the first decade of the Restoration. Since the capital needs of

agriculture were small even after the landlords devotion to
the improvement of agricultural techniques and introduction
of winter drainage, the increasing savings and surplus of
landlords were transferred out of the primary sector into
other sectors. The fiscal system as a whole was heavy in
absolute terms yet highly regressive. The burden was
constantly on the agriculture sector, even when
non-agricultural sectors were growing at a phenomenal rate.
As seen in Figure 1, under indirect taxes, before the turn of the century, the excise taxes played a prominent yet second
to land taxes at about 20% of the government's total
revenue. These included taxes on soya, sugar, textiles and
government monopoly profits in tobacco, camphor and salt.
The combined effect of the land taxes and consumption
taxes was heavy taxes on both peasant and consumer and a
lighter burden for the landlord and industrial-merchant
classes. The income tax did not appear until 1887 and the
business tax which was the corporate tax did not come into
effect until 1896 and at a low flat rate of 3%. The result was the subsidizing of the manufacturing and service sector at the expense of the primary sector. To strengthen the incentives
for reinvestment and accumulation of productive wealth was
strengthened by the absence of inheritance and real estate
taxes before 1905 and a relatively low rate thereafter. The
role of the family and the firm that existed also as a closely bound unit also...
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