A tax system that does not trust the productive power of the people

Abstract

The global economy grew by 2.8 times from 1997 to 2019. Meanwhile, Japan’s economy grew by only 15%. Even heavily sanctioned countries such as North Korea, Venezuela, and Iran, grew by 60%, 75%, and 5.6 times respectively during the same period of time. Even war-torn countries such as Somalia, Libya, and Afghanistan, grew by 26%, 80%, and 6.5 times respectively (United Nations Statistics Division1). Japan was the second largest economy in the world in 1997. However, Japan’s growth rate has been the worst in the world since then. What has happened to the country? Japan’s economy began to slow down in the fiscal year (FY) 1990 and reached negative growth from FY 1997. After that, thanks to unprecedented monetary easing and enormous-scale fiscal spending, Japan’s nominal gross domestic product (GDP) reached a record high in FY 2016 for the first time in 19 years; however, more easing and more fiscal spending can no longer be expected. Because Japan’s tax revenue effectively peaked in FY 1990 and that caused a huge budget deficit and accumulated public debt. And this made the social security system in jeopardy. Japan’s strength until the 1980s was neither a coincidence nor a miracle; it was the tax system that supported the economy and public finances well. At that time, there was no consumption tax that levies on sales no matter how the economic condition is, while the income tax which is the fruit of production was highly progressive. The corporate tax rate was also high. This allowed people to compete in a more equal environment, which resulted in higher productivity and consequently higher tax revenue. The tax reform of FY 1989 destroyed Japan’s economy. In the face of higher inflation coupled with a weaker yen, another tax reform that goes back to the pre 1989 system is urgently needed. The tax system is the foundation of a country. This paper may give a clue to how to solve your own country’s problems as well.