Opinion Editorial | |
| Monday, April 13, 1998 | |
Taxes are Sinking Japan |
Japan's economy is in trouble. Last year, real gross domestic product
(GDP) grew just 0.5 percent and it will be lucky to do that well this year,
according to private forecasters. Japan's unemployment rate has reached
a 45-year high and its international bond rating has recently been downgraded
by Moody's Investors Service. The Japanese stock market has fallen by 40
percent since 1990 and the once rock-solid yen has dropped by a third in
the last two years. The main government response has been to pour billions
of dollars into public works projects of dubious economic value. The root of Japan's problem lies in a massive increase in taxes over
the last three decades. Low taxes were a key reason for Japan's economic
success in the 1950s and 1960s. Taxes were cut almost annually, leading
to higher economic growth. High growth, in turn, raised government revenues,
which financed further tax cuts. In 1966, total taxes consumed just 17.8
percent of gross domestic product (GDP) in Japan, compared to 24.6 percent
in the U.S. However, by 1995 Japan's tax burden had increased by 60 percent
to 28.5 percent of GDP, now putting it above the U.S.'s 27.9 percent figure. The impact of higher taxes on economic growth in Japan is unambiguous.
The tax burden in Japan has eased somewhat in recent years. But this
is due more to the economic slowdown than the result of tax cuts. Indeed,
Japan, which once had one of the most pro-growth tax systems in the world,
now has one of the most anti-growth. Economists point to the tax rate on
corporations as being especially burdensome. A typical Japanese company
first pays a national tax of 37.5 percent, then a corporate enterprise tax
of 12.6 percent, and finally a corporate inhabitant tax of 20.7 percent,
for a total tax rate of 57.9 percent. This is well above the 35 percent
corporate rate in the U.S. Individual taxes are also high, with a top rate of 65 percent and a national
sales tax of five percent on almost everything. Japanese Prime Minister Ryutaro Hashimoto continues to resist any serious
tax reduction effort, favoring only temporary tax cuts aimed at stimulating
consumption, rather than investment. Unless stronger action is taken, the
Japanese economy is likely to remain stagnant. Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis),
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