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CESifo / LBI Conference on
Sustainability of Public Debt
22 - 23 October 2004
Evangelische Akademie Tutzing
Better Off than Europe:
Taxes and Public Debt in Japan
Adam Posen and Daniel Popov Gould
CESifo
Poschingerstr. 5, 81679 Munich, Germany
Phone: +49 (89) 9224-1410 - Fax: +49 (89) 9224-1409
E-mail: [email protected]
Internet: http://www.cesifo.de
Conference Draft
Incomplete
Better Off Than Europe: Debt and Taxes in Japan
Adam S. Posen* and Daniel Popov Gould
Institute for International Economics
October 20, 2004
Prepared for the CESifo Conference on Debt Sustainability
*
Contact [email protected]. We are grateful for prior conversations on related topics with
Larry Ball, Chris Carroll, Ken Kuttner, Martin Muhleisen, and David Weinstein, and for
advice and assistance from Hiroshi Tsubouchi. We remain solely responsible for all
content and any errors in this paper. ©IIE, 2004.
1
Japanese government finances have been widely seen as going from bad to worse in the
last decade. A common but mistaken presumption is that Japan embarked on a path of
unbridled fiscal stimulus in the 1990s and that such stimulus was either ineffective or
unsustainable. Headline debt to GDP ratios of over 160% have been cited as the results
of this fiscal excess.1 A recent paper by Broda & Weinstein (2004) [henceforth B&W],
however argues cogently that Japanese debt levels have been exaggerated, partly because
of the mistaken use of gross rather than net figures, partly through ignoring the double
counting in the Japanese government accounts. Properly accounted, Japan’s net debt to
GDP ratio is closer to 70 percent.2 Furthermore, once one turns to the forward-looking
question of long-term fiscal sustainability, the present level of debt matters very little, if
at all, depending on the time-horizon one chooses -- so long as the current level of debt is
not explosive at the upper end of likely interest rates. Instead, fiscal sustainability is
determined by the projected evolution of the future debt levels, the population, economic
growth, the country’s pension obligations and the government’s revenue collection, not
upon today’s debt.
In this paper we break down the potential causes of declining sustainability of Japan’s
fiscal path into three categories – increases in public spending, demographically-driven
rises in government transfers (primarily social security and medical expenditures), and
declines in government revenue. In Section 1 we find that neither fiscal stimulus, nor the
aging Japanese population have significantly contributed to the current deficits. The fall
in government revenue since the early 1990s has contributed the most to the decline in
public balances. This fall in revenue, in turn, has been caused by s combination of
cyclical declines in revenue, tax policies and most noticeably, from the mid-1990s
onwards, the ongoing erosion of the various tax bases.
1
See, inter alia, Asher and Dugger (2000), Asher (2001), Katz (2003), Smithers (??)…
The OECD has consistently reported such a figure for Japanese net debt, and part of B&W’s argument is
to show that adjustments do not alter this result. Some Japanese officials (e.g. Eisuke Sakakibara while
Vice Minister of Finance) and economic observers (e.g., Posen (1998, 2000)) previously expressed
skepticism about overstatements of the state of Japanese debt. Hoshi and Doi (2001?) provide a useful
realistic accounting of the Japanese government’s balance sheet, including discounting of assets and
estimates of contingent claims in the financial system, which B&W references.
2
2
The conclusion that the high Japanese government budget deficits have emerged because
of declining revenue, rather than growing expenditures (discretionary or age-driven), redirects our analysis of long-term Japanese fiscal sustainability. Section II unpacks three
different fiscal sustainability models into their components shows that while fragile, the
results of any mainstream model suggests that the current Japanese spending path is
sustainable despite demographics. Achievement of fiscal sustainability, over any long
time-horizon becomes largely a matter of economically feasible, though politically
difficult, tax policy measures, which Section III takes up more concretely. Section IV
draws comparisons between Japan’s and some aging major European countries’ fiscal
situations, with less than pleasant implications for European sustainability.
1 – The Three Components of the Japanese Budget Balance.
Any declines in government budget balances are either due to increases in expenditure
and/or falls in revenue. These, in turn, are the results of either cyclical or structural
factors, or, more likely, a combination of both. A decomposition of Japanese budget
balances in the 1990s along these lines will help us to project more accurately the likely
future path of government balances and the source, if any, of unsustainability. If the
decline in Japanese government balances were largely cyclical, there would be little
reason to worry (assuming a return to higher average growth is feasible); if most of the
decline were driven by aging of the society, the onus would fall on hard choices about the
generosity of the welfare state. If, however, most of the decline in Japanese budget
balances is due to the erosion of government revenues, as we will show to be the case, the
situation is much more susceptible to stabilization through normal government policy.
Net Public Spending and Social Security Outlays
We define net public spending as year over year change government consumption and in
public investment, indicating the discretionary segment of government spending. Figure
1 plots the contribution made by public demand to Japanese GDP growth over the 19902003 period and total GDP growth in constant prices. The striking observation is how
3
relatively little role net fiscal expenditure has played over the entire period.3 The two
lines, illustrating net public spending and total GDP growth, show that with the exception
of 1993 and 1998-99, Japanese government was not using deficit spending on net to
fiscally stimulate the economy. Driven by 1993, in the 1990-1996 period, net public
spending contributed on average 0.9 percentage points to GDP growth, while overall
Japanese GDP grew by 2.3% on average in 1990-96 so government share in GDP did not
climb. In the 1997-2003 period, this contribution dropped to less than 0.1 percentage
points per year on average, so though GDP grew only 0.9% on average per year in 19972003, government share in the economy declined.
Not only has fiscal activism in
expenditures been absent in Japan over the entire 1990-2003 period, but in the last eight
years net public spending has been hovering around zero and in fact has been negative on
average throughout the recent recovery.4 Despite the lack of growth in government
expenditures, the Japanese budget deficit, as shown in Figure 2, did not stop growing in
1996 as would be suggested by if expenditures alone were the issue.
This ‘missing stimulus’ has been noted before, initially by Posen (1998), with respect to
its counter- (or pro-) cyclical implications. In the context of sustainability, the question
becomes, if there was little net spending stimulus, why has Japanese government balance
worsened so much over the period in question? Public demand includes all government
expenditures on goods and services that directly contribute to aggregate demand growth.
However, government transfers and interest payments are not usually considered to be
stimulative and therefore are not included in the public demand figures. Nonetheless
transfers and interest payments still count as government outlays. The largest transfers
by far made by the Japanese government are related to social security. Of the total social
security payments by government in FY1998 (latest available data), almost 70 percent
went to the elderly in the form of pension benefits and medical care. The other 30
3
See Posen (1998, 2004) for discussions of the limited role of fiscal policy in stabilization, if not procyclical behavior until 2002.
4
This says nothing about the efficiency or lack thereof of government spending, or its distribution. For a
discussion of the distortions of Japanese public works spending, see Bergsten, Noland, and Ito (2001), Katz
(2003), and Kuttner and Posen (2001).
4
percent were spent non-age related medical expenses, and it is reasonable to assume that
these proportions still hold.5
The lion’s share of transfer payments being related to age-related social security
expenditures, in Figure 3 we plot the total government expenditure that includes social
security transfers and interest payments in comparison to those components of
government expenditures that make up public demand.6 While the public demand to
GDP ratio has remained relatively constant over the entire 1990-2003 period, rising by
less than one percentage point, total government outlays rose by almost five percentage
points, and the gap between them – i.e., the outlays attributable to social security transfers
– has risen to around 9% of GDP per year (subtracting interest payments. As illustrated
by Figure 4, the difference in growth rates between social security transfers and GDP has
varied greatly between years, but transfers have always grown at least a full percentage
point faster, and as much as 5% faster during the recessions. This explains why
government outlays rose while public demand has been constant – government transfers
in the form of social security payments account have grown as a proportion of GDP.7
This large and growing gap between Japanese public demand and total government
expenditure could be taken to imply that social benefits payments will become an
increasingly unbearable burden on the public finances. Such a conclusion would ignore
the fact that Japanese social benefits are financed primarily not through general
government revenue but through specific social security contributions from the private
sector to the government. Comparing the inflows and outflows of the Japanese social
security accounts as ratios of GDP, Figure 5 demonstrates that the system has been in
primary surplus until 1999 and since then the primary deficit has been less than half a
percentage point of GDP. In addition, IMF (2004) has noted that the Japanese pension
system, which accounts for the bulk of social benefits outlays, has been run on a pay-asyou-go basis to date despite possessing assets equivalent to approximately 50% of GDP.
5
These proportions may have shifted marginally towards the elderly as the Japanese population continues
to age. We will try to get data on changes in the dependency ratio since 1998.
6
In FY2003, interest payments constituted 1.6% of GDP
7
Again, this conclusion is not driven by the declines in GDP over the 1993-2003 period. Real growth of
social benefit payments by the government has been above real GDP growth, as shown in Figure 4.
5
The existence of this cushion should not be taken to imply that there are no potential
difficulties in store. If benefit outlays were to grow by 3% a year more than GDP, this
asset stock would be drawn down rather quickly. Accordingly, much attention has been
devoted to the future health of this framework, of the pension system in particular.
However, the current near-balance in the social benefits framework shows that the aging
population of Japan has not been the cause of budget balance deterioration over the last
decade and a half.
Dwindling Government Revenues.
We now turn to the revenue side. To look at aggregate revenue figures is misleading. It
appears that revenues/GDP ratio has dropped only 3 percentage points while
expenditures/GDP ratio has risen more than 6 percentage points – illustrated by Figure 6.
However, this masks a much more significant fall in taxation revenue that does not
include social security contributions. Figure 7 plots the evolution of total government
revenue/GDP ratio broken down into two components: taxation revenue and social
security contributions. Direct taxes in Japan are mostly paid on corporate and personal
income – and both these sources of revenue fluctuate with the business cycle. Social
benefits contributions are roughly fixed vis-à-vis the business cycle – the National
Pension system is based on a fixed contribution while the Employee Pension Insurance
(EPI) also has a contribution rate fixed to the person’s salary. Although there is room for
cyclical variation in social security receipts due to changes in employment levels, this
does not affect the aggregate numbers in Japan significantly. Unemployment in Japan is
slow to change in response to economic fluctuations, thus not affecting the pension
contributions paid and corporate pension plans have not been widely adopted.
Meanwhile overtime and pay bonuses are a substantial part of Japanese workers’ pay
packets and do vary greatly with the cycle.
Figure 7 indicates that taxation revenue/GDP ratio has experienced a very large drop,
even larger than the rise in social security outlays – almost six percentage points as a
share of GDP over the 1990-2003 period. In contrast, social security contributions have
risen 2.5 percentage points. The overall fall in taxation revenue was, thus, approximately
6
3.5 percentage points of GDP. Given that the tax revenue/GDP ratio is related to cyclical
developments, it is instructive to ask what would be the fiscal situation today if Japan had
not experienced a prolonged economic downturn.
It is important to note that the large fall in taxation revenue is not entirely due to cyclical
factors. The Japanese government cut taxes on a number of occasions, starting with
special tax reductions in 1995 and 1996 and culminating in a permanent tax reduction
package that began in 1999 and is still ongoing. Projecting tax revenue growth from
1990 onwards for a given set of macroeconomic assumptions requires one to separate out
the cyclical component of the downturn and the policy-induced one. B&W offer an
approximation that the tax cuts the Ministry of Finance implemented in the 1990s
resulted in a 2 percentage point decrease in the tax revenue to GDP ratio. Their method
involves taking the long-term (1980-2000) average of the tax revenue to GDP ratio and
looking at the same ratio in 1990 viewing the difference between these two as a proxy for
the effect of the tax cuts. The implicit assumption in this methodology is that the high
revenue to GDP ratio in 1990 could have been sustained in the absence of intervention by
the MoF. However, given the special nature of the year 1990 as the last bubble year, it
may be a mistake to consider the tax revenue to GDP ratio in that year as indicative of
some new steady state for higher revenues. Indeed, given that the after the high of 1990
the tax/GDP ratio merely returned to its long-term average level, rather than below it,
may imply that this decline was not policy induced but represented a natural correction
after a few years of bubble-economy increased revenues.
For the present paper, we will limit ourselves to projecting the potential tax revenue
under more favourable growth scenarios and simply noting that the difference between
the actual and projected tax revenues cannot be fully attributed to differences in GDP
growth rate alone. Our projection of government revenues is based on the assumption
that the Japanese economy continued to grow at its full potential annual growth of 2.2%
since 1990.8 Only the tax revenue is iterated as that is the component we are treating as
cyclically determined. The base value for the projection was determined by taking an
average of total tax revenues over the 1987-1992 period to control for potentially
8
See Posen (2001) and Kuttner and Posen (2001) for discussions of Japanese potential output.
7
distorted values in 1990. GDP elasticity of taxation revenue was taken to be 1.25, a
standard estimate for Japan and other advanced economies (though the results do not vary
much with reasonable variation in this parameter). Actual base value of tax revenue was
iterated at the potential growth rate. Because we were comparing actual revenue time
series with the projected revenue series we could not present the results as ratios to GDP
because that would introduce different denominators. The results are therefore presented
in Figure 8 in actual yen values, expressed in constant 1993 prices.
To determine what fraction of the fall in tax revenues has been due to the Japanese
economic downturn and what has been due to the tax cuts and tax system inefficiency, we
also project the 1990 base value for revenue using actual real GDP growth numbers,
rather than the 2.2% constant potential growth. Although this method does not control
for any feedback effects tax cuts may have on GDP growth, the projection should
nonetheless provide an approximation of the tax revenue had the tax system remained the
same since 1990. These results are also plotted in Figure 8, along with total government
outlays less social security expenditures, and the actual course of government revenues
less social security contributions.
There are two important results. The first is self-evident – assumption of growth at a
constant potential output results in a large difference between actual and projected
revenues. Indeed, in this case, assuming expenditures do not change, Japanese public
balance would be in substantial surplus. The second result demonstrates that even had
tax revenues grown only at the actual rate of real GDP growth over the period, taxation
revenue should have been substantially higher than what it was. Indeed, the second
projection is far closer to the first projection than to the actual revenues observed.
Treating this projection as a control for cyclical effects, the conclusion is that the bulk of
the revenue fall is due to non-cyclical factors – these can either be tax policy changes or
the erosion of the Japanese tax base. We return to this latter point in the third section
where we show that a preliminary analysis of disaggregated revenue time series indicate
little explicit tax policy impact on revenue. The preliminary indication is that the
8
Japanese taxation framework deteriorated substantially over the 1990s – had it remained
intact since 1990, today’s Japanese government balance would be almost zero.9
2 – Different Approaches to Sustainability, Similar Conclusions
Having identified revenue decline and their tax policy sources as the main factors that
have driven Japanese government deficits in the preceding decade and a half we now turn
to the task of projecting public finances into the future. The specific question that we are
asking is whether the present government financial framework is sustainable in the longrun.. First we look at the concept of ‘sustainability’ as it has been applied to public
finances. While the problem of sustainability is essentially one of an intertemporal
budget constraint, substantially different indicators of sustainability have been proposed
at different times. Some are simply the results of focus on different elements of the
intertemporal constraint such as the tax rate or the primary budget balance, while others
carry implicitly within them more subjective judgments regarding inter- and intragenerational equity as well as impact of government’s actions on it. This discussion will
link to the previous section’s by focusing on a sustainability indicator that identifies the
gap between the current and projected revenue to GDP ratio and the one required to
stabilize the debt to GDP ratio to some pre-specified level over a fixed time-period.
Specifically, we consider three distinct models of public fiscal sustainability. The first is
Generational Accounting [henceforth GA], proposed in the early 1990s by Alan
Auerbach and Laurence Kotlikoff. This modeling approach was used by Takayama,
Kitamura and Yoshida (1999) to assess fiscal sustainability of Japanese public finances as
they were in the late 1990s. The model is chosen in part because of the strikingly
pessimistic and widely-cited results that it generates and partly because we consider it a
clear example of positive methodology being combined with subjective and nontransparent standards of intergenerational equity.
9
This is a positive, not a normative statement. As a matter of welfare, Japan was most likely far better off
with expanded deficits during the recession, especially to the degree that expansion came through tax cuts.
See Posen (1998), Kuttner and Posen (2002).
9
The second approach we consider is based on a general equilibrium model (GEM) that
allows for feedback and second-order effects of fiscal policies and a more realistic
interaction of macroeconomic variables such as the savings rate, labour supply and
demand, interest rates, and the balance of payments. The lack of feedback effects in most
models has often been cited as a reason for their potential to miss important side-effects
of policy changes, in particular those that have a very uneven incidence in a population
such as changes to pension contributions.10 The staff at the IMF, notably Faruqee and
Muhleisen (2001) [henceforth F&M], have used GEM methodology to assess the
sustainability of both the general Japanese public finances and the country’s pension
system in particular. We acknowledge that the benefits of GEM approach include the
possibility of testing the impact of various policy changes in the short- to medium-run.
However, the complexity of its methodological framework offers little advantage in
forecasting longer-term sustainability issues over more stylized and parsimonious
approaches. Thus, the final model that we consider is based on B&W (2004) that in turn
closely follows the approach of Blanchard (1990), based on a simple intertemporal
budget constraint.
Sustainability Criteria
We begin by simply asking ‘sustainability of what and in terms of what?” The answer to
the former can either be general, such as ‘public finances’ or it can be programmespecific, for instance ‘of the pension system’ or ‘of medical care’. In any case, the
underlying question is whether the fiscal path a country is on today can be adhered to in
the future11 – an intertemporal constraint of inflows and outflows into general public
finances or a specific programme over that horizon. The constraint is not strict over a
specific time horizon because a government can issue debt to cover its expenditures in
period t and repay in period t+n. At the heart of the concept of sustainability, therefore,
10
For example, the most recent spate of Japanese pension reforms has come under fire from Takayama
(2004) who argues that official projections which guided policy makers in legislating systemic pension
changes ignored the effects higher employer pension contributions will have on Japanese unemployment http://www.ier.hit-u.ac.jp/~takayama/pdf/en/pension/JapanEcho0410.pdf
11
“Future” should be thought of in terms far off but finite time horizon, infinite time horizons present their
own eccentricities that require additional assumptions and may impose too great a weight on the distant
future.
10
is the concern of sustainability of government debt – formally, sustainability is defined as
when the real debt is growing more slowly than the interest rate at which it is being
serviced. In the scenario where debt grows more quickly than the interest rate, any
further debt issue becomes a form of a Ponzi scheme and will ultimately be recognized as
worthless. Importantly, this definition of sustainability does not address itself to the
question of intergenerational equity. As such, it remains a purely technical criterion. In
discussing the GA approach we return to the subject of subjective ‘equity’ criteria. At the
moment, however, we continue to define the purely technical terms.
Taking debt to be the center of fiscal sustainability, we can write a formal intertemporal
budget constraint that will help us define potential sustainability criteria. Take the
following:
Bt-Bt-1 = Gt+Ht-Tt+iBt-1
(1)
All the above variables represent actual values, not GDP ratios. Where Bt and Bt-1 are
total debt in periods t and t-1, respectively. Gt is government consumption in period t, Ht
are transfers in period t, Tt are tax revenues in period t and i is the nominal interest rate.
Re-writing the above expression as ratios of GDP yields:
bt = gt+ht-τt+[(1+i)/(1+µ)]bt-1
(2)
with lower case letters denoting the GDP ratios of their capital letter equivalents from
equation 1. The exceptions are τt which denotes the tax revenue to GDP ratio in period t
and µ which denotes the rate GDP growth. The expression (1+i)/(1+µ) is the differential
between the interest rate and GDP growth, the adjustment factor for future flows.12
Already, this simple, two period expression can be used to demonstrate what could be our
‘sustainability criteria’ – g, r and t are all instruments of fiscal policy and any one of them
could, potentially, be held constant to see how the other variables in the constraint would
evolve. For example, we could ask what values of government transfers and government
12
It does not matter whether i and µ are both real or both nominal – what matters is the gap between them
because that is the fraction that determines what level of debt growth is sustainable.
11
expenditure to GDP ratios could be sustained in period t given a fixed revenue/GDP ratio.
In a two period model like above, such an exercise is of limited value because we do not
model a multi-period potential dynamic of explosive debt.
For that we re-write the above constraint for an n-period horizon:
bn =
t=1
Σ
n
[(1+i)/(1+µ)]n-t * (gt+ht-τt) + [(1+i)/(1+µ)]n * b0
(3)
Where bn is the total debt debt to GDP ratio in n periods and all other notation replicates
equation 2. Most of the common technical sustainability criteria can be expressed by
manipulating the terms of the above equation. For instance, a focus on the debt to GDP
ratio at some point in the future, n periods away would be expressed as setting a
maximum limit for bn on the left hand side. Such an approach was adopted by the
European Economic Policy Committee in a 2001 report.13 The Committee considered an
‘arbitrary’ 60% debt to GDP ratio as a ceiling for assessing sustainability of European
public finances, together with the ‘close to balance or in surplus’ requirement of the
Stability and Growth Pact. Such a concrete target however, ignores the dynamic nature
of the debt sustainability constraint – the aforementioned condition for debt sustainability
is that the growth of debt to GDP ratio be lower than the interest rate/gdp growth rate
differential. A 60% limit per se is a static measure – a country may well exceed the limit
for any given multi-year intervening period, but be on a clear adjustment path to reduce
the debt level below the cap. A debt to GDP ratio cap can be imposed, but its utility lies
in public commitment - influencing expectations that the fiscal discipline will be enforced
and the path of budgets will be monitored – not as an assessment of sustainability itself.
A related but more flexible criterion is to set a target debt to GDP ratio for some point in
the future and calculate the necessary adjustment that needs to be made. This adjustment
can be expressed in terms of the tax to GDP ratio necessary to achieve the desired debt to
GDP balance over the set horizon – the difference between the required and the actual tax
ratio is called the ‘financing gap’. Formally this requires the re-writing of (3) to express
13
“Budgetary challenges posed by ageing populations: the impact on public spending on pensions, health
and long-term care for the elderly and possible indicators of the long-term sustainability of public
finances.” Brussels, 24 October 2001 EPC/ECFIN/655/01-EN final
12
the sum of all future budget balances over the pre-set time horizon as equal to or less than
the desired debt/GDP ratio and then solving this inequality for ‘τ’. This is the approach
put forward in Blanchard (1990) and applied explicitly to Japan by B&W. A different
but closely related criterion that was also proposed by Blanchard (1990) has been the
‘required primary surplus’ – the difference between the actual primary balance and the
primary balance required to reduce the debt to GDP ratio or to keep a balanced budget,
the latter merely implying a constant public debt in nominal terms.
Specific Models and their Conclusions on Japanese Fiscal Sustainability
The discussion of the sustainability criteria has been motivated until now by the formal
arguments derived from the intertemporal budget constraint. Models, such as GA, that
incorporate more explicit welfare requirements as to the ‘fair’ distribution of resources
across generations exist and but these, by necessity, rest on the formal conditions
discussed above. It is the imposition of some strong assumptions in the model, not the
parameterization or data used that drives the overall conclusions of GA. The generational
accounts technique was applied to Japan by Takayama, Kitamura and Yoshida (1999).14
Comparatively, the Japanese accounts were found to be in significantly worse state than
other countries. While the 1999 generational imbalance in the US was 51% or
approximately $53,000 per person and Germany was projected to have a 92% or a
$180,000 per person imbalance, Japan was declared to have a 269% imbalance,
amounting to $293,000 (2003 US dollars).
In other words, “given prevailing fiscal policies and demographic trends net lifetime
payments by those born tomorrow onwards in Japan will be more than 260 percent higher
than of those born today. To close the intergenerational gap the 1999 study found that
Japan would have to cut government purchases by 26%, raise income taxes by 54% or cut
all transfer payments by 29%.” Translating this into the ‘financing gap’ as a sustainability
indicator, the 54% income tax rise needed to balance out intergenerational equity
according to Takayama, Kitamura, and Yoshida (1999) is equivalent to an increase in the
13
overall tax revenue to GDP ratio of between sixteen and nineteen percent.15 This is our
sustainability benchmark generated by the generational accounts approach
While daunting, this result is generated by the GA approach’s welfare assumptions, not
just sustainability concerns. GA takes a zero-sum view of all future government inflows
and outflows over an infinitely long horizon. The principle is simple – future generations
will have to pay for everything that has been purchased or given away presently and has
not yet been covered by the present flow of revenues. A gap between the net tax
payments current generations make and the net payments of the future generations is the
indicator of fiscal unsustainability.16 The model thus makes one overarching ethical
assumption about intergenerational equity – none of the future generations must pay more
than the present generations. Although this may seem like an innocuous value, when this
zero-sum value-judgement is combined with other model-wide assumptions, the
conclusions become much more loaded.
There are three such other assumptions. First, as pointed out by Buiter (1996), is the
assumption that strict life-cycle theory holds – particularly that there is not even partial
links of wealth and bequests across generations, leading to exaggerated estimates of
intergenerational redistribution effects of the government budget. The second
assumption, related to the strict life-cycle hypothesis is that the timing of government
benefits and rising taxation does not matter – individuals are not liquidity constrained and
thus the key statistic used by generational accounts, the lifetime net payment, is a
sufficient indicator of the individual burden. Bohn (1992) makes the argument that
binding liquidity or borrowing constraints will cause the timing of taxation paid by an
individual and benefits received over his or her lifetime to matter.
14
It is important to note that the authors do not provide a detailed methodological explanation of their
application of GA to Japan. Therefore we discuss the model in terms of its generic outline as provided by
Auerbach and Kotlikoff (1996) and other relevant work.
15
This is arrived at by looking at what share of total tax revenue income tax comprises and what a 54%
increase in that revenue would imply for the magnitude of increase of the entire tax revenue base. The
numbers vary from year to year but are in the 16-19 percent region.
16
While generational accounts use the term ‘generation’ this can be somewhat misleading to
conceptualizing the model and later its shortcomings. GA estimates the net lifetime payments made by
cohorts born in each consecutive year, rather than within a commonly understood ‘generation’. Therefore,
the claim that ‘each generation has a separate account’ actually implies much more detailed apportionment
across the population’s profile, with the difficulties this brings.
14
The final assumption, and the one most relevant for our interests, in the GA framework is
the absence of intergenerational distribution effects of government taxes and benefits.
Public expenditure can have very different distributional effects on the different parts of
the population and although generational accounts do assign some publicly provided
goods according to the age profile, what the methodology considers as non-age related
expenditure, which in practice is all public consumption, is distributed equally across all
generations. Yet it is clear that different baskets of government consumption will have
different intergenerational distribution effects – education, for example, is a government
expenditure that clearly benefits the young rather than the old. Reduction in education
expenditure by the government would be presented by generational accounts as reducing
public consumption evenly across all generations, yet instead it would disproportionately
affect the younger generations. However, re-categorizing education expenditure as
transfers to the school-age population creates a different distortion – the cost of education
is most often carried by the parents and thus should not be ascribed to the children
directly – in particular this creates a false impression of very low net payments by the
younger generations.17 Due to the benchmark comparison of the net burden on the
newborn with that on the future generations this ultimately makes an enormous difference
to the perceived intergenerational gap.
Table 1 illustrates sensitivity tests of the Takayama et al (1999) conclusions to changes in
the overarching assumptions. The differences in results that are due to the relatively
minor changes in the discount rate or in the attribution of education’s benefits illustrate
the non-robustness of this method’s conclusions. The generational accounts use a riskadjusted discount rate, yet it is both ethically and methodologically dubious to impose a
common risk adjustment on all future generations – ethically because we cannot commit
stably to our own, let alone future, attitude to risk; methodologically because even small
differences in the discount rate which can well arise due to mistaken perceptions of what
17
It is also notable that given the intergenerational deconstruction of fiscal policy, GA has come under
criticism for neglecting incidence and second order effects of both taxation and transfers. General
equilibrium considerations are important in this context because second order or ‘induced’ effects of
redistribution from the young to the old on, say, savings rate or labour supply will have important overall
effects that are ignored by this methodology. The topic is partly addressed by Fehr and Kotlikoff (1996)
but cannot be dismissed.
15
the risk-adjustment should be. This translates into large errors in the bottom-line of the
intergenerational gap.
TABLE 1 - Japanese Generational Accounting - Sensitivity Tests
(US dollars, thousands)
Education as Consumption
Generational Gap (%)
GDP growth = 1.5%
r=3
r=5
GDP growth = 2%
r=3
r=5
96
169
84
146
139
338
115
261
Education as Transfers
Generational Gap (%)
Source: Generational Accounting Around the World (1999), Table 19.4
Of course, other models also use a form of a discount technique to calculate present value
of the future debt. The important distinction is that while generational accounts require
an explicit discount rate to be set and argue for a risk-adjusted rate on an a priori basis,
other sustainability models use the differential between interest rate and GDP growth,
which is less arbitrary and better able to vary over time.
The other form of sensitivity that Table 1 illustrates is sensitivity to parametric
assumptions. Altering the classification of education expenditure by the government
leads to a very large change in the generational gap even keeping growth and discount
rate assumptions constant. However, this should be considered more an illustration of the
problem of over disaggregation, rather than of specific parameterization per se. If treated
as a transfer, outlays on education are allocated to the 0-24 year generations and as such
greatly lower their net payments – the upshot of this is that the intergenerational gap is
substantially increased (the gap is calculated as the difference between the lifetime
payments of newborns and all future generations). Treating education as government
consumption means that the burden is not allocated to any particular generations. The
benchmark result in the first case, where education is treated is consumption, with
assumed GDP growth at 1.5 percent and discount rate 5 percent, is a 170% generational
gap. The case where education is treated as a transfer yields a gap of 338% - almost
exactly twice as high as the previous figure.
16
By limiting the inquiry to projection of future revenue and expenditure flows driven by
the demographics, many of the problems faced by GA would be avoided. In the case of
education expenditure, it would no longer be apportioned directly to the age group that
receives it but shared across society at any given time. This is the approach that is taken
up by the other two models we review. GA, stripped of its idiosyncratic view of
intergenerational equity and present value discounting, yields a very similar methodology
– the underlying dynamic strata of the model are generic.
Parameterization and Inputs – Cross-Model Comparison
To clarify the cross-model comparison it is easier to focus on the expenditure side of
fiscal sustainability. Present concerns have been about the demographic impact on agerelated expenditures – pensions and healthcare. The more pertinent dynamic is thus on
the expenditure side because this is where large changes will occur as the Japanese
population ages, life-expectancy increases and fertility rates decline. Indeed, many
models project government revenue over long-time horizons merely by fixing an initial
revenue to GDP ratio and adjusting the denominator by a constant growth factor over the
projection period..18
Table 2 presents a cross-model comparison of Japanese fiscal sustainability. While it is a
little treacherous to make comparable the conclusions of models that differ in
methodological assumptions and, in the case of GA, in welfare criteria, we have
proceeded as follows. For all three, the future total tax revenue to GDP ratio is calculated
taking the B&W assumption that the present tax base is 32.4 percent of GDP.19 The
outcomes of the models to compare are the financing gap or change in taxes needed,
assuming that expenditures and transfers remain on trend (though the trends differ
18
Because our fiscal sustainability indicator is the financing gap which explicitly relies on accurate
projections of the revenue side of the intertemporal budget constraint, future work will have to formalize
demographics’ impact on government revenues. An increasing dependency ratio for example, will lead to
declining personal income tax revenues; in the other direction, a graying population where the retirement
age and median worker age are rising may offset some of those revenue effects. These are likely to be
much smaller effects than the increase in outlays, and in any event are more under government control.
19
Using OECD Economic Outlook numbers, the average revenue to GDP ratio over the 1983-2003 period
should be 31.3%, a percentage point lower than B&W state. In addition, if we are concerned by recent tax
17
slightly between B&W and F&M, and the GA results have to be converted into their
tax implications). Where possible, the scenarios with growth rates for Japan in the
range of potential (1.5-2.5% annual growth) are taken, though in F&M this was not
available. With all that in mind, the results are:
GA:
-
The implied income tax increase required to close the intergenerational gap
approximated by the highlighted case (education treated as consumption, r=5,
growth of 1%) is 56%.
This is roughly equivalent to a 16-19% of GDP increase in the total tax
revenue to GDP ratio, raising it to 48-51% of GDP.
Assuming growth of 2% instead reduces the needed increase to X%
B&W:
- The demographic projections are the same used by the IMF where there is a
projected fertility rate recovery to 1.6 by 2030, from the current 1.3 (This
corresponds approximately to the high variant projection by the Japanese
Institute of Population and Social Security).
- “Sustainable tax rate” is defined as the revenue to GDP ratio that is required to
ensure the net debt to GDP ratio returns to its present level (62%) by 2100. No
cap on the maximum debt level on any given year between now and then is
imposed (Imposing a 120% cap on any year’s debt level influences the
sustainable tax rate only marginally).
- The total tax revenue has to increase to 35.6% of GDP, assuming 2% growth and
5% interest rates, meaning a rise of about 6% over today’s levels.
F&M:
- 2010 horizon delineates the period in which the net debt to GDP ratio (excluding
social security system assets) is stabilized at 120%, a few percent higher than
today.20
- The long-term sustainable tax rate is set as part of a fiscal policy package needed
to achieve the 2010 goals. Other measures in the package include reducing
annual government consumption by 1% of GDP and government public works
spending by 3.5% of GDP (which have already been partly met).
- 2070 horizon envisages a reduction of the net debt to GDP ratio (excluding social
security assets) to 60%. The IMF estimates suggest that a further 4% of GDP
increase in government revenues is necessary for this.
- This assumes a rather low TFP growth rate of 0.75%, whereas potential growth
(essentially TFP given the slow decline in population) is likely more than twice as
large.
revenue erosion, then we should also consider that today (FY 2003) the revenue to GDP ratio is below
30%. So perhaps all results here for the financing gap should be increased by 2% of GDP.
20
To make this comparable to the Broda and Weinstein estimates that include social security assets, this
means stabilizing the debt to GDP ratio at 70% by 2010
18
19
TABLE 2 – CROSS-MODEL COMPARISON OF FISCAL SUSTAINABILITY
Generational Accounting
(net lifetime payments remaining, US $, 1995 prices)
GDP growth = 1.5% GDP growth = 2%
r=3
r=5
r=3
Education as Consumption
Generational Gap (%)
96
169
84
r=5
Broda & Weinstein
Sustainable Tax Rates
GDP Growth 2%
r=3
Growth in Per Capita Transfers Proportional to GDP
33.4
Growth in Per Capita Transfers Proportional to per worker GDP
41
r=5
35.6
41.1
146
IMF (2001)
Education as Transfers
Generational Gap (%)
139
338
115
The implied income tax cut required to close the intergenerational gap
approximated by the highlighted case is 56%, which is roughly
equivalent to 16%-19% of GDP increase in the total tax revenue.
to GDP ratio to 48%-51% of GDP
20
261
TFP growth = 0.75%
"r" is endogenous
Growth in Per Capita Soc. Sec. Transfers Proportional to CPI
37.4(2010 horizon)
41.4(2070 horizon)
The rough similarities between the B&W and the F&M estimates of the financing gap
form a basis for policy analysis. GA clearly an overly pessimistic picture and apart from
subjective welfare judgments there are some methodological reasons for this divergence.
GA treats the net lifetime payments of all future generations as a residual based on the
estimates of the net lifetime earnings paid by the current generations and all present as
well as future government consumption.21 Formally, the equality is as follows:
t=p
Σ
ΣD N
Gt - t=0
p, p-t
= t=1
Σ
Np, p+t
(4)
The first summation on the left hand side is the present value of all government
expenditures from the present moment (p) to an infinite future horizon. (Government
expenditures that cannot be allocated to a particular generation are further broken down
in Eq. 5). The second summation on the left hand side is the present value of remaining
net payments to be made by each generation that is alive at the present time (at time p),
the second sub-script (p-t) defining the age of the generation in question. The youngest
generation covered will be the one that is born at time p (p-0), the oldest being the one
that dies in period p (p-D). Similarly, the right hand side summation is the present value
of lifetime net payments of all the future generations (born at p+1 and onwards, to
infinity).
Net lifetime payments of the present generations are estimated using survey-constructed
age and sex profiles for per capita earnings and government transfers received in a base
year (Takayama et al used the 1993 Survey on the Redistribution of Income). The net
value of all the transfers a new born can expect to receive over her lifetime and all the
payments she will have to make, are calculated and discounted to present value,
represented by the sum of Nt, p. A similar technique is adopted to calculate total future
flows of government consumption.
Gt = gy, t * Py, t + gm, t * Pm, t + go, t * Po, t + gt * Pt
(5)
Gt is the total government expenditure (that does not include generation-specific transfers
made by the government) in period t. Equation 5 thus defines the single-period
Σ
component of the most right-hand side summation in equation 4 - t=p
21
Gt. Equation 5
The GA model also includes wealth but we exclude it for reasons of convenience in discussion.
21
does not discount Gt to its present value at p. In turn, gy, gm, and go are base values of per
capita expenditures on the young, working age, and old. These are adjusted by a preset
growth factor to yield their values at period t in the future - gy, t gm, t and go, t.
Py, t , Pm, t Po, t are sizes of the population that is young, working age and old, respectively,
used to calculate total government expenditure on the specific age group. Letters g and P
denote the base value of the residual per capita government expenditure that cannot be
traced to any specific age group and is thus spread across the entire population – P.
Discounting the total of future government consumption and deducting the discounted net
lifetime payments of the present generation, as per equation 4, the difference is what the
future generations will have to pay. Because the flow of transfers to the future
generations has already been determined in calculating the net lifetime earnings of the
present generations, any imbalances that are left in equation 5 are borne by the gross
lifetime payments that the future generations will have to make.
By contrast, the B&W approach uses a classic intertemporal constraint, which, in relation
to GDP, is written as follows:
bn =
t=1
Σ
n
[(1+i)/(1+µ)]n-t * (gt+ht-τt) + [(1+i)/(1+µ)]n * b0
(6)
Where… bn, b0, g,t, ht , τ, i and ρ are debt level n-periods into the future and current debt
level, government expenditure and transfers to the old at period t, tax revenue, interest
rate and GDP growth rate, respectively.
The future debt on the RHS is similar to the generational accounts’ gross lifetime
payments of the future generations – the imbalance between the projected future
government expenditures and transfers and the revenue inflows. The difference,
however, is that B&W do not attempt to apportion explicitly the burden to particular
generations and are not, therefore, forced to make a number of assumptions regarding
distribution of transfers discussed earlier. B&W do model government expenditures and
transfers in a similar manner to the generational accounts. Breaking up per capita
22
government outlays into those that are age related and those that are not, B&W project
these into the future using demographic assumptions about the population:
Gt = [(1+γ)t * h0]/[Po, t]* [Po, t/Pt] + [(1+µ)t * g0]/[Py, t]* [Py, t/Pt]
(7)
Gt is the total per capita government expenditure that includes both transfers and
government consumption, at period t. Growth rate γ represents growth of the base year
value of the total government expenditures on the old - h0 (‘old’ defined as ‘retired’).
The growth rate µ represents the growth of the base year values of total government
expenditures on all the other age groups - g0. The base values thus grow at constant (but
potentially different) rates over the projection period and per capita expenditure is
calculated by weighing the proportion of the population category in the total population
in the future, at period t - Po, t/Pt , Py, t/Pt for the ‘old’ and the ‘young’ population
segments, respectively.
Equations 5 and 7 are very similar in their mechanics – both mechanically project per
capita government outlays into the future. Generational accounts impose the same
growth rate on all the outlays components - gy, gm, and go while Broda and Weinstein
allow for different growth rates, determined by political economy factors. If they were to
make the same assumption as generational accounts, then the growth-rate adjustment
terms (1+γ)t and (1+µ)t could be collapsed to a single term, leave equation 7 looking like
a simplified version of equation 5. The remaining difference is that while equation 7
determines total per capita government outlays, including both transfers and
consumption, equation 5 calculates only the consumption part of total government
outlays. Transfers, in turn, are allocated to specific generations by GA and when
combined with present value discount, resulting in strange results.
The final method we briefly address is the IMF’s general equilibrium approach. The
IMF’s MULTIMOD model was applied to Japan by Muhleisen (2000, 2001) and F&M.
Their conclusions are tabulated in Table 2. While the authors choose the same
sustainability indicator as B&W – the net debt to GDP ratio at a fixed point in the future,
they model a wider range of policy options and thus the required financing gap they come
up with must be considered in relation to other measures they find necessary to stabilize
the net debt to GDP ratio in 2010 and reduce it by 2070. In addition, the F&M analysis
23
was done using FY1998 data which reflected the Japanese economic downturn, perhaps
producing an overly pessimistic prognosis for public balance evolution. In light of these
differences, it is striking how similar the conclusions of the two models, B&W and F&M,
are. Depending on the assumption as to how generous future transfers to the elderly will
be, the two methodologies diverge, at most, by four percentage points in the sustainable
tax rate and are nearly identical for other implications.
This is less surprising when we consider that methodologically, F&M used a separate
fiscal model to approximate the path of Japanese public finances, the output of which was
then fed into the general equilibrium model. Thus the general equilibrium module was
not used to predict paths of the government transfers, expenditures and revenues directly.
It was only used to interact the simpler model of their evolution with endogenous
macroeconomic variables such as the interest rate, savings and labour supply behaviour
and economic growth. F&M (2001) offer a careful and thorough general equilibrium
analysis of Japan’s fiscal sustainability and policy impact. Yet for the long-term impact
they understandably do not provide surprising conclusions. F&M (2001) conclude that
while the Japanese government balance is much worse than most other OECD countries,
based on their model, Japan can stabilize its future debt to GDP ratio through a sequence
of feasible adjustments. Taking into account their more ambitious goal of stabilizing the
debt to GDP ratio in eight years and reducing it to a level lower than what B&W suggest
by 2070, rather than by 2100, the similarities in the scale of policy prescriptions are
striking.
3 - Breakdown of Japanese Taxation Revenue (incomplete)
Given the clearly sectoral decline in Japanese tax revenues and its dominant role in
explaining the emergence of Japanese deficits, it is useful to break out the various
components of government revenue. In particularly, in view of extensive list of tax
policy changes that the Japanese government has undertaken, it would be instructive for
future policy to determine what effect these reforms have had on the revenue flows.
While explicit matching of time-series changes to various tax components to legislated
tax reforms is beyond the data available of this paper, some discussion is necessary –
particularly if the financing gap is to be closed by future tax increases.
24
Figure 9 breaks out total Japanese government revenue into direct and indirect taxes and
social security contributions received by government as a percent of GDP. The
remaining component of government revenue, such as property income and other transfer
receipts has remained at an approximately constant GDP ratio of 4% throughout the
period. The dashed line indicates nominal GDP growth over the period. Table 3 tabulates
the timing and the summarizes the substance of taxation reforms since the late 1980s.
The key reforms were in 1988 when the personal income tax system was rationalized
(reducing the number of tax brackets from 12 to 5, among other measures) and the top
tax-rate lowered from 60% to 50%. In addition, a national consumption tax was
introduced. Other key reforms began in 1998 when major tax cuts were initiated, spread
over the next several years, in particular cuts in the corporate income tax rates and
increased generosity of personal income tax deductions. These policies began to be
reversed, beginning in 1993, when the erosion of the tax bases, specifically in the
personal income tax sphere, had been recognized.
The picture depicted in Figure 9, however, is one of little corresponding revenue impact
of the tax reforms, even in the two years we identify as introducing overarching changes.
The 1988 introduction of the consumption tax, for example, appears to make almost no
difference to the indirect tax revenue levels.22 What is more striking is the rapid decline
in direct tax revenues, which while initially driven by the low profitability of firms, is far
steeper than the decline in nominal GDP. The late 1990s and early 2000s give equally
little indication of a correlation between changes in revenues and in tax code changes.
Extensive corporate tax reductions in 1998 and the introduction of a consolidated
corporate tax system in 2002 do not appear to have induced change in the direct tax time
series. The only clear pattern in direct taxation is an absolute decline in revenue. In real
terms, direct tax revenues fell by almost 50% between 1991 and 2003.
22
It could be argued that because OECD Economic Outlook data is calendar year based, while the
Japanese fiscal year runs from April to March, the one quarter lag should mean some of the effects of any
tax changes would appear in the following calendar year. Of course, this ignores expectational effects
which would move in the opposite direction.
25
What is also notable is the relative stability of the indirect taxes collected over the
Japanese business cycle, and that stability in comparison to the growth of social security
contributions (itself something of a mystery). The 1997 reinstatement of the
consumption tax, estimated by Kuttner and Posen (2002) to have had a contractionary
effect on GDP in excess of 1.5%, had little effect on revenues, consistent with a high tax
multiplier and/or some form of Laffer effect. It appears that economic downturns
increasingly affect direct tax revenues – the downturn in 1985-88 did little to the tax
revenues, but all the following downturns have all significantly reduced it, while the
1995-97 upturn did not have the symmetric effect. In particular, the most recent and
quite strong upturn in the Japanese economy since 2002 appears not to be matched by a
similar upturn in direct tax revenue. The tax base is eroding.
4. The Implications for European Sustainability (to be added)
26
FIGURE 1
Japanese Public Spending and GDP Growth
6
5
%, Annual GDP Growth
4
3
2
1
0
1990/112.
1991/112.
1992/112.
1993/112.
1994/112.
1995/112.
1996/112.
1997/112.
1998/112.
1999/112.
2000/112.
2001/112.
2002/112.
-1
Government Consumption
Public Investment
Net Public Stimulus
GDP Growth
-2
Source: Cabinet Office, Government of Japan
Notes: The time series are in constant 1993 prices
27
2003/112.
FIGURE 2
General government balance in percent of GDP
4
2
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
% GDP
-2
-4
-6
-8
General government balance in percent of GDP
-10
Source: IMF, WEO September 2004
28
2001
2002
2003
2004
FIGURE 3
Public Demand and Total Government Outlays
42%
Nominal GDP
37%
32%
27%
22%
Public Demand
Total Government Outlays
17%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Data from OECD Economic Outlook #74, 2004
29
2004
2005
FIGURE 4
Real Growth Rates of GDP and Social Benefits Paid by Government
9%
8%
7%
6%
Annual Growth
5%
4%
Average Y-on-Y Soc Sec Benefits Growth - 4.3%
3%
2%
1%
Average Y-on-Y GDP growth-1%
0%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
-1%
Social Benefits Paid by Government
-2%
Data from OECD Economic Outlook #74, 2004
30
Real GDP
2002
2003
2004
FIGURE 5
Social Security Outlays and Receipts
12%
11%
% GDP
10%
9%
8%
7%
Soc. Sec. Contributions Received
Soc. Sec. Outlays
6%
1990
1991
1992
1993
1994
Source: OECD Economic Outlook #74, 2004
1995
1996
1997
1998
1999
2000
2001
2002
31
2003
FIGURE 6
Total Government Outlays and Revenues
39
37
% GDP
35
33
31
29
Total Outlays, incl. Soc. Sec.
Total Rev, incl. Soc. Sec.
27
1990
1991
1992
1993
1994
1995
Source: OECD Economic Outlook #74, 2004
32
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
FIGURE 7
Government Revenue Breakdown
32%
% of GDP
27%
22%
17%
12%
Total Taxes
Social Benefits Contributions
Total Revenue
7%
1990
1991
1992
1993
1994
Source: OECD Economic Outlook #74, 2004
1995
1996
1997
1998
1999
2000
2001
2002
33
2003
FIGURE 8
Tax Revenue Decline - Controling for Cycle
170
160
A-2.2% growth
Yen, trillion, 1993 prices
150
140
B - Actual Growth
130
120
110
100
90
Data from: OECD Economic Outlook 2004 and IMF World Economic Outlook, Sept 2004
80
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Total Receipts less Soc. Sec. Contributions
Total Exp. less Soc. Sec. Exp.
Projected Total Receipts less Soc. Sec. (at potential growth)
Projected Total Receipts less Soc. Sec. (at actual growth)
34
Revenue as % of GDP
14%
FIGURE 9
Breakdown of Japanese Taxation Revenue
GDP Growth, %
Key Tax Reform Years
13%
12%
11%
10%
9%
8%
7%
6%
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Total Direct Taxes
Indirect Taxes
Soc. Sec. Contributions
35
TABLE 3 - Summary of Tax Reforms in Japan 1988-2003
Measures for:
Direct Taxes
Indirect Taxes
Social Security
Temporary Cuts
Year of Tax Reform
1988
1991
1994
1998
1999
2000
Increase in
employment income
Rationalizing personal income Introduction of Consumption deduction by 50% to 15
tax structure
Tax - 3% at national level
million yen
Reducing maximum personal
income tax rates
Increasing various personal
exemptions
Lowering the corporate tax
rate 42%-37.5% between
1988 and 1999
Extending benefits to Small
and Medium Enterprises
Extending exemptions to the
Consumption Tax
Reducing personal income
and inhabitant tax burdens
Consumption tax rate raised
to 4% from 1997
Increasing various personal
exemptions
Local Consumption tax
introduced - 1%
Temporary 15% personal
income tax reduction (max
50,000 JPY) - FY1994 only
Temporary 15% inhabitant
tax reduction (max 20,000
JPY) - FY1994 only
2 trillion yen personal
income and inhabitant tax
reduction in FY1998 only
Land Value Tax Suspended no end date specified
Corporate taxes cut - 37.5%
to 34%
Measures taken to broaden
the corporate tax base
Cuts in corporate taxes - 34% Abolition of securities
to 30%
transaction tax and bourse
Tax Credit for Housing Loan
introduced and revised for the
following two years
Personal Income Tax credit
equivalent to 20% of the
annual income tax - 250,000
yen cap
Abolition of taxation of
employers' pension
contributions
Expansion of the Housing
Loan Tax Credit Programme
Extension of favourable tax
treatment of SMEs - capital
gains and retained income
Abolition of some additional
personal allowances and
reduction in others
2002
Creation of a consolidated
corporate tax system to
further rationalize the
framework
2001
New taxation system for
restructuring of corporations
to encourage rationalization
2003
Abolition of the additional
spouse tax
Reduction of exemptions for
consumption tax
Scaling down the simplified
tax scheme