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Monday, Sept. 30, 2002

A theory that doesn't work


For the market economy to function effectively, equal opportunity must be guaranteed in all sectors of society. In today's Japan, however, there is no such guarantee. For example, the opportunity for a Japanese person to become a Diet member is far from equal, because many retiring Diet members have their son or daughter take over their constituency. Many company owners prefer to have their offspring take over the business after they retire. Students of private high schools, with higher scholastic standards, have a better chance of passing college entrance examinations than do students of public high schools.

Uneven income distribution, stemming in part from unequal opportunity, should be ameliorated by progressive taxation. Where unequal opportunity is deemed unfair and equal opportunity is considered unfeasible, progressive taxation is essential for a fair society. This is basically the theory of U.S. economist John Kenneth Galbraith.

Most Japanese economists, however, believe in market fundamentalism and argue that income tax rates should be less progressive.

In the ongoing debate on tax reform, many experts contend that progressive taxation tends to weaken social vitality. In their opinion, income tax rates should be lowered as much as possible and the proportion of consumption tax in tax revenues should be increased -- or the ratio of direct and indirect taxes should be revised. Advocates of market fundamentalism, who propose narrowing the gap in income tax rates by increasing the minimum rate and reducing the maximum rate, believe in the thesis that income gaps motivate people to work. In their opinion, the rich work hard to become richer and the poor work hard to get out of poverty. This thesis, which has never been verified, is nothing more than an empty mantra.

What drives people to work?

In a 2001 interview with author Natsuki Ikezawa, I mentioned that many economists assume diligence stems from income gaps. Ikezawa disagreed, saying those experts were "totally ignorant of the significance of working." The question is whether a job is worth doing and is satisfying to the worker -- not how much he gets.

Conservatives claim that if equal opportunity is guaranteed, that is enough. In their opinion, income gaps stem from abilities and efforts of individuals, and narrowing the gaps through progressive taxation is "unfair." The maximum income tax rate in Japan is 50 percent, which means that a high-income earner, on making an extra 10 million yen before tax a year, gets only 5 million yen in additional net income. To make people work harder, the maximum tax rate should be cut, say advocates of market fundamentalism.

Until the early 1980s, the maximum income tax rate exceeded 70 percent. I doubt if Japanese in those days were less diligent than now.

Japanese lost some of their enthusiasm for work after the bubble economy of 1987-90. In 1987, Japan exceeded the United States in per capita gross national product and ranked No. 4 in the world, following Switzerland, Luxembourg and Iceland. Japanese were euphoric at having achieved their long-standing goal of catching up with the West, and their enthusiasm for work appreciably declined. In the 1990s, the maximum tax rate was sharply reduced, but that failed to make people work harder.

We should seriously consider what motivates people to work. In Japan's high-growth era, many engineers worked hard to develop new products that dominated the international market. The feat of these engineers, mostly graduates of industrial high schools, was featured in NHK-TV's documentary program "Project X." I do not think they were motivated by monetary rewards.

Takamitsu Sawa, professor of economics at Kyoto University, is also the director of the university's Institute of Economic Research.


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