Taxation in Japan - statistics & facts
Taxes are the main source of revenue for governments. They are essential for financing the provision of public services and other government spending and can function as a means of income redistribution. Hit by the asset price bubble burst in the 1990s and the Lehman crisis in 2008, Japan has struggled with declining tax revenues over the past decades. The tax revenue has recently been on a recovering path but cannot meet the government’s growing spending obligations.
Taxes are levied by the central government and local governments, such as prefectures and municipalities. On the national level, consumption tax generated the highest tax revenue, followed by income tax, and corporation tax. On the local level, resident tax, an income-based tax imposed on individuals and corporations, constituted the largest source of tax income, followed by local consumption tax, and fixed asset tax.
Taxation on consumable goods and services was first introduced in 1989. Since then, rates have been raised several times, last in October 2019. Parallel to this, income tax rates were gradually cut to counter the economic slowdown. This is why over the past years, income tax revenue has remained rather stagnant, while consumption tax revenue has been on an upward trend.
Japan has a progressive tax system for income tax, with one of the highest tax rates for high incomes in the world. The declining share of income tax in Japan’s total tax revenue also is argued to have weakened the income-redistribution effect of taxation in Japan over the past years.
Tax revenue and fiscal deficits
Driven by positive economic development and a consumption tax hike, Japan’s tax revenue rose for the fourth consecutive year in the fiscal year 2022. Tax and other income have not been sufficient to cover Japan’s growing expenditures that stem from mounting social security spending and public debt services payments. The government runs a fiscal deficit each year and issues debt to finance the remaining costs.Taxes are levied by the central government and local governments, such as prefectures and municipalities. On the national level, consumption tax generated the highest tax revenue, followed by income tax, and corporation tax. On the local level, resident tax, an income-based tax imposed on individuals and corporations, constituted the largest source of tax income, followed by local consumption tax, and fixed asset tax.
Consumption tax has become the largest source of tax revenue
Over the past decades, the share of consumption tax in Japan’s national tax revenue has been growing at the expense of a declining share of income tax. In the fiscal year 2020, consumption tax exceeded the revenue from income tax for the first time. Why did this happen?Taxation on consumable goods and services was first introduced in 1989. Since then, rates have been raised several times, last in October 2019. Parallel to this, income tax rates were gradually cut to counter the economic slowdown. This is why over the past years, income tax revenue has remained rather stagnant, while consumption tax revenue has been on an upward trend.
Japan has a progressive tax system for income tax, with one of the highest tax rates for high incomes in the world. The declining share of income tax in Japan’s total tax revenue also is argued to have weakened the income-redistribution effect of taxation in Japan over the past years.
