“Creating a new fiscal constitution in post-war Japan”

In the latest tax history talk, Professor Martin Daunton from the University of Cambridge, addressed the subject of how the Japanese tax system was reformed following World War II. This restructuring has been described as “the most dramatic tax reform programme ever launched in a modern industrial nation…”. In his talk, Professor Daunton combined the economic and fiscal history of Japan in the late 1940s, with the story of two experts dealing with the same problem.

After the end of the war, Japan was facing very high inflation, and had to be rebuilt following the Allied attacks on key cities. The occupying American forces, under General MacArthur, were faced with reshaping Japanese society to create a stable democracy, whilst removing the origins of militarism, and tax was an imporantt aspect of this. However, instead of a single united approach, President Truman and General MacArthur each appointed their own advisors to address the problem.

Truman’s appointment as economic advisor to the Japanese stabilisation programme was Joseph Dodge, a banker. Dodge’s proposals, known as the “Dodge line” included stimulating exports and reducing spending, introducing a single exchange rate for the Yen, and imposing fiscal austerity. This approach, which was not sympathetic to local circumstances, was based on the premise that Japan could not be reconstructed “without suffering”.

MacArthur invited Carl Shoup, an academic, to lead a mission to reform the Japanese tax system. Shoup, who is credited as the father of value added tax, was more sensitive to local conditions. In essence, he proposed broadening and democratising what had been an autocratic state, as well as encouraging responsible behaviour by bringing more people into contact with the state, through income tax.

Overall neither approach prevailed, and features of both proposals were adopted, which was good for Japan initially, although less so in the longer term. What was perhaps most striking was the uncoordinated approach adopted by the US – although as Professor Daunton explained, this was not without historical precedent.

Caroline Turnbull-Hall
February 2015