Tax reform, Japanese style

JAPAN is taking a leaf out of the American political handbook. The issue: tax reform, which Prime Minister Yasuhiro Nakasone would like to push through Japan's Diet (parliament), just as President Reagan got tax reform through the United States Congress. What is of special interest in all of this is that tax reform, Japanese style, could well have a major effect on the nation's highly successful savings policy. Reforming taxes could also affect whether Japanese consumers are able to step up their purchases of domestic-made products, as many Japanese business leaders and economists are now urging in the light of new protectionist challenges from abroad to the nation's exports.

Clearly, Japan does need to make its tax code fairer. It also needs to increase its tax revenues, both to offset current high deficits and to provide funds for programs to support a growing population of elderly people. But how to change the tax code to meet such goals without at the same time working against the existing savings rate will be the main challenge.

The Japanese have one of the highest savings rates in the world -- far, far in excess of the comparable American savings rate. Part of the reason is cultural: Japanese families are expected to provide more care for their elderly than are families in the United States, where elaborate social security and social welfare programs are in place. Part of the reason is also economic: Japanese industry has geared production more to its massive export market than to its own domestic economy. In other words, its workers have been asked to put more money into savings plans than into the consumption of Japanese consumer goods. But, as noted, there is now a need to rethink that policy as curbs against Japanese-made goods are increasingly thrown up abroad.

Tax reform, if it comes to Japan, is still a long way down the road. Two possible changes would be particularly controversial: ending tax-free interest on savings plans and adopting some form of new indirect, or value-added, tax, which could discourage domestic consumption.

Japanese lawmakers can be expected to think through tax reform carefully. Japan needs to ensure continuing capital formation. It is a land that is relatively poor in natural resources, but rich in terms of the hard work and ingenuity of its work force. It is also a society that is facing increased competition from abroad. Thus, it will have to assess tax reform in this larger global context, not just in terms of its domestic economy.

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