Introduction

Before the first oil shock in 1973, there was wide agreement in Japanese government and business circles that the tax system should be actively employed to promote economic growth. On the basis of tax-incentive policies, several special measures were formulated to stimulate exports, private savings, and investment. These usually included tax exemptions, tax-free reserves, and accelerated depreciation. Linked with Japanese industrial policies, these tax-incentive policies often received credit when authors tried to explain the rapid economic growth in the 1950s and 1960s.

It is, however, very difficult to ascertain the effectiveness of tax incentives adopted to achieve specific policy purposes. In fact, the evaluation of these policy effects has been controversial, subject to many difficulties. These difficulties are mainly due to the scarcity of quantitative studies examining the effects of tax incentives on economic activity. In some cases, it is almost impossible to quantify the effect of these policies.

Since the late 1970s, the basic strategy of tax policy has been shifted from tax incentives to tax neutrality and equity. The main reason for this is that large fiscal deficits have accumulated since the late 1970s. To curtail future fiscal deficits, the Japanese government decided that a substantial tax increase could not be avoided. As a prerequisite to a tax increase, it is acknowledged that the government should take the initiative in improving the inequitable burden of income taxation.