NCPA - National Center for Policy Analysis

Supply Side Reforms Bolster Japan

October 13, 1999

The Japanese economy, recently in the doldrums, has rebounded remarkably. The reason for this, observers believe, is a set of reforms similar to those the world has seen work at least twice before: Ronald Reagan's in the U.S., and Margaret Thatcher's in Britain.

  • In April, the Japanese government cut the highest marginal personal tax income rate (federal and local) from 63 percent to 47 percent.
  • The highest corporate tax rate was cut by 10 percent to just over 40 percent.
  • Small business tax rates were cut from about 34 percent to 27 percent.
  • There were no phase-outs, no exceptions, no ties to deficit reductions; in other words, pure supply-side economics.

That wasn't all. Japan also cut the capital gains tax rate and the death tax rate, abolished the tax on stock trades, and suspended for two years the special one percent tax on corporate pensions. As a result, the yen has strengthened on the foreign exchange markets, the stock market shows dollar gains of 36 percent (and is now the best performer in the world) and Prime Minister Keizo Obuchi's popularity is soaring.

The changes are just in time. During the 1990s, government spending led to huge deficits and a national debt in dollar terms larger than that of the United States. In response, Japan leveled the highest tax rate of any Group of Seven country, which slowed the economy further without raising extra revenue. Even now, after reforms are underway, Japan still has an all-time high in unemployment and output growth has been non-existent. Prime Minister Obuchi's reforms, which now could include social security reform, couldn't have been more timely, observers say.

Source: Arthur B. Laffer, "Japan Rises Again," Wall Street Journal, October 11, 1999.


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