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OECD Recommends Fiscal Reform In Japan

by Mary Swire,, Hong Kong

17 September 2015

Japan needs to implement tax reforms in order to achieve fiscal sustainability, according to a recently released report from the Organisation for Economic Cooperation and Development (OECD).

The report, Achieving Fiscal Consolidation While Promoting Social Cohesion in Japan, pointed out that Government revenue in Japan is low compared to other OECD countries. It said that there is scope for revenue increases, focusing on taxes that are less harmful for growth, such as the consumption tax.

The Japanese Government targets a primary deficit of 3.3 percent of gross domestic product (GDP) for central and local governments in fiscal year 2015. Achieving this target hinges on reaching the projected nine percent increase in tax revenue, the OECD said.

The report said that, given Japan's high public debt and rising aging-related expenditure, the country's tax burden needs to be increased while reducing expenditure.

The report recommended further raising the consumption tax, while keeping a single rate. A value-added tax (VAT), such as Japan's consumption tax, is acknowledged to be a relatively stable revenue source and is less harmful for economic growth, as it imposes fewer distortions on employment and investment, it said. It argued that a greater role for the VAT would also improve inter-generational equity, as the elderly would bear more of the tax burden.

The OECD also said that broadening the base of the personal income tax would make Japan's progressive tax rates more effective in reducing inequality. Currently personal income tax revenue in Japan is low because of a narrow base. Less than half of the estimated JPY260 trillion (USD2.15 trillion) in personal income in fiscal year 2014 was taxable, the report said.

Finally, the report advised the Japanese authorities to broaden the corporate tax base and raise environmental taxes.

TAGS: environment | tax | investment | economics | value added tax (VAT) | fiscal policy | gross domestic product (GDP) | Organisation for Economic Co-operation and Development (OECD) | corporation tax | environmental tax | tax rates | tax reform | individual income tax | Japan

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