"Local VAT in Japan: sustainable foundation for future"(in Japanese)

Local VAT had been introduced in Japan in FY1997. Several problems became evident with the current system. The purpose of this paper is to identify these problems in detail and to suggest reform options in the light of international experience and the fiscal federalism literatures. We argue that contrary to traditional wisdom, it is possible to allow local governments to set their rate of VAT independently, within the framework of revenue-sharing arrangement on the basis of consumption statistics. To do so, however, requires some changes in the current systems;(1) when origin prefecture imposes local VAT on the 'final sales' rather than the 'central VAT liability', even if each prefecture levies the tax at variable rates, calculating tax under the input tax credit mechanism leads to an appropriate outcome; (2) our new allocation formula on the basis of 'revenue potentials' allows local governments to set their tax rate independently. In addition, we argue that in the view of exactness, Harmonized Sales Tax in Canada that derived consumption statistics from inter-regional Input-Output table is ideal for allocating tax revenue to the destination region. Until inter-regional input-output table will be designated by the government, some feasible reform package should be adopted: (1) deduction exempt final sales from designated statistics; (2) removal of employees' share; (3) increase in the weight assigned to population share and decrease in the weight assigned to designated statistics.