Public finance is the economic activity of the government, which collects taxes and uses them for society as a whole. Social security is one of its pillars.
Basic Knowledge
The three functions of public finance are: ① resource allocation (providing public goods), ② income redistribution (progressive taxation and social security), and ③ economic stabilization (fiscal policy).
Classification of taxes:
・National taxes (income tax, corporate tax, consumption tax, and so on) and local taxes
・Direct taxes (taxpayer = bearer of the burden, such as income tax and corporate tax) and indirect taxes (taxpayer ≠ bearer of the burden, such as consumption tax and liquor tax)
Income tax is based on progressive taxation (the higher the income, the higher the tax rate) and has an income-redistribution function. Consumption tax has the problem of regressivity (the lower the income, the larger the burden as a percentage of income).
The four pillars of social security are: social insurance (pensions, medical care, nursing care, employment, and workers' compensation), public assistance (livelihood protection), social welfare (the elderly, people with disabilities, and children), and public health (infectious disease control, water supply, and sewage).
As the birthrate declines and the population ages, social security costs are increasing, making it necessary to secure funding.
Fiscal policy (policy in which the government adjusts economic conditions through expenditure and revenue)
Progressive taxation (a system in which the tax rate rises as income increases, such as income tax)
Consumption tax (standard rate 10%, reduced rate 8%. An indirect tax with the problem of regressivity)
Government bonds (government debt whose repayment burden affects future generations)
Social insurance (the five types: pensions, medical care, nursing care, employment, and workers' compensation)
Livelihood protection (public assistance based on the right to maintain the minimum standards of wholesome and cultured living in Article 25 of the Constitution)
In Depth (Background and Significance)
Japan's public finances are in a serious condition. About one-third of revenue depends on public debt (borrowed money), and the outstanding government debt is more than twice GDP, the worst among developed countries. On the expenditure side, social security costs account for about one-third and continue to increase.
Consumption tax was introduced at 3% in 1989 and has been raised to 5% (1997) → 8% (2014) → 10% (2019). A reduced tax rate (8% for food and other items) has also been introduced.
Considering the burden on future generations, fiscal consolidation must be promoted through both expenditure cuts and revenue increases.
- Three fiscal functions = resource allocation, income redistribution, and economic stabilization
- Direct taxes (income tax and corporate tax) and indirect taxes (consumption tax)
- Progressive taxation = income-redistribution function
- Regressivity of consumption tax = lower-income people bear a larger percentage burden
- Consumption tax introduced in 1989; 10% in 2019 (reduced rate 8%)
- Four pillars of social security = social insurance, public assistance, social welfare, and public health
- Outstanding government debt exceeds twice GDP
Points to Note (Easily Confused)
① Distinguish direct taxes (income tax and corporate tax) from indirect taxes (consumption tax and liquor tax). ② Progressive taxation means a higher tax rate for high-income earners; income tax is the main example. ③ Do not leave out any of the four pillars of social security. ④ The reduced tax rate for food, newspapers, and similar items is 8%; other items are taxed at 10%.
Practice
- Explain what kind of tax system progressive taxation is.
- Give all four pillars of social security.
- Of income tax and consumption tax, which is a direct tax?