Not enough yen to balance the budget;

              Tax Reform in Japan
Not Enough Yen
to Balance
the Budget /
^ .c? J
by HIROTAKA FUKUYAMA / International Tax Services
Tohmatsu Awoki& Co., Tokyo
Like other industrialized and energy-dependent countries hit hard by
the oil crisis in 1973, Japan has been struggling the last few years to
balance its federal budget. In the following article, Mr. Fukuyama
traces his government's unsuccessful attempts to do so by means of funda­mental
changes in the Japanese tax laws. [Editor]
In 1973, before the first oil crisis, Japan
maintained an annual economic
growth in real terms of approximately
10 percent. As company profits and
individual taxpayer income grew year
by year during this high-growth period,
so did tax revenue. This revenue was
enough to finance almost all govern­ment
spending and avoid having to
issue government bonds to finance any
revenue shortage. During this period,
the Ministry of International Trade and
Industry proposed various tax incentives
almost every year, and the Ministry of
Finance usually gave favorable consid­eration
to these proposals, knowing
that economic growth eventually
resulted in an overall increase in tax
revenue.
When the effects of the first oil crisis
began to be felt, the character of the
Japanese economy began to change, as
did the government's fiscal policy. In
the last two quarters of fiscal 1974,
Japan experienced a negative growth
in GNP, the first since World War II.
Between then and 1980, GNP rose once
again but only to about half of what it
had been before the oil crisis. After the
second oil crisis hit in 1980, that growth
further slowed to 2 or 3 percent. But to
maintain even this level of growth,
government spending had to sustain
approximately an 18 percent annual
increase, because the government had
pushed up public works spending.
With corporate earnings and wage
earners' income deteriorating, tax
revenue did not increase at the same
rate as public spending. Therefore, to