RIETI Symposium

Fiscal Reform of Japan: Redesigning the Frame of the State

Project Paper - Session 4

"The Political Economy of Tax Reform" (Abstract of Discussion Paper 04-J-013)

KUNIEDA Shigeki (Assistant Professor, Graduate School of International Corporate Strategy, Hitotsubashi University)

The greatest problem with Japan's tax reform to date is the government's failure to realize a net increase in tax revenue as is required based on the inter-temporal budget constraint equation. Still, for many years, the administrative fiscal authorities and the centralized decision-making mechanism for tax reform within the Liberal Democratic Party had somehow resisted the temptation of implementing the kind of fiscal measures that would not fit into the equation and thus leave excessive burden on the future generations, for instance, implementing income tax cuts without compensatory financial resources. Drastic political change and an economy in the doldrums in the 1990s, however, broke the mold and temptations were succumbed to, turning Japan into the country most exploitative of future generations.

This paper analyzes past tax system reform processes based on recent theoretical analysis of political economics as well as on the results of empirical studies. Furthermore, it discusses rules for tax system reform and the reform process (or an institutional organization for undertaking reform) that would enable extreme generational disparities to be corrected through adequate tax reform to fulfill requirements imposed by inter-temporal budget constraints. Regarding the so-called "Voodoo Economics" that have been used to justify fiscal policies outside the budget constraints equation, the paper analyzes why such voodoo policy proposals influence actual fiscal policies. As to the generational disparities seen today, the paper calls for the establishment of a basic law to ensure generational equality by correcting the existing disparities that are so extreme that they could almost be described as "generational exploitation."

Original discussion papers in Japanese [PDF:444KB] >>