Tale of a Missed Opportunity: Japan’s Delay in Implementing a Value-Added Tax

Abstract

While a value-added tax (VAT), which supports a welfare state, was officially introduced in Japan in 1989, earlier attempts to implement this tax system failed. This study looks in-depth at why Japan was slower than other countries to implement a VAT. The tax authorities’ debates during the 1960s and 1970s are reviewed to understand why other attempts to introduce a VAT failed. Implementing the VAT would require a shift from the ideology centering on a direct tax to acceptance of indirect taxes and justification for a general consumption tax’s superiority over specific consumption taxes. Four influential factors are identified. First, in 1960, the ideology centering on a direct tax made a VAT inherently inferior. Second, in the 1968, “Break Fiscal Rigidification Campaign” created a revenue-neutral path for indirect tax increases but favored specific consumption taxes. Third, the Fundamental Issues Subcommittee conceptualized “high benefit/high cost” in the early 1970s and established the VAT’s superiority over specific consumption taxes based on a study of overseas travel to European Commission countries. However, the VAT was abandoned due to external shocks. Fourth, the attempts to link the VAT with fiscal reconstruction in the late 1970s faced strong opposition from consumers, small businesses, and the ruling party. Failure to introduce the VAT in the 1970s eliminated the possibility of using it to raise taxes in the early 1980s. The findings reveal that Japan’s failure to introduce the VAT closed a door to a “high benefit/high cost” type of Western-style welfare state.