Tax reform is an urgent priority, as Japan needs as much as 5% to 6% of GDP of additional
government revenue just to stabilise public debt, which has risen to 180% of GDP. In addition to raising
revenue, tax reform should promote economic growth, address the deterioration in income distribution and
improve the local tax system. Additional revenue should be obtained primarily by increasing the
consumption tax rate, currently the lowest in the OECD area, while broadening the personal and corporate
income tax bases. The corporate tax rate, now the highest in the OECD area, should be cut to promote
growth, while eliminating aspects of the tax system which discourage labour supply and distort the
allocation of capital. Japan should also consider introducing an Earned Income Tax Credit to promote
equity. The local tax system should be simplified, increasing reliance on existing taxes on property, income
and consumption.
