Takashi Kuribayashi, Director of Chiba University of Commerce Research Center for Economics

The expiration of the provisional tax rate for gasoline (gasoline tax and local road tax) has caused confusion in the market. Gasoline tax, which accounts for about 85% of gasoline tax, was 5.2% of the national tax revenue in the FY2007 budget, when the provisional tax rate was applied, which is about three times the customs duty (1.7%) and tobacco tax (1.7%), and about twice the liquor tax (2.7%). Gasoline tax is a special-purpose tax that is used only for road-specific financial resources. The provisional tax rate expired at the end of FY2007 (March 31, 2008), and gasoline tax was reduced by 25.1 yen per liter from April 1. The provisional tax rate was also applied to automobile acquisition tax and automobile weight tax in addition to gasoline tax, so the expiration of the provisional tax rate has resulted in a significant reduction in tax revenue of about 2.6 trillion yen in total. The major problem at this time is that the reduction in tax revenue will lead to a reduction in grants to local governments, which will prevent them from carrying out necessary road construction.

According to the traditional principle of non-affectivity in fiscal science, earmarked taxes that tie specific tax revenues to specific uses are undesirable because they lead to fiscal rigidity and inefficiency. Thus, from the perspective of earmarked taxes, gasoline taxes are undesirable. Furthermore, gasoline taxes are individual consumption taxes that target specific goods and services, and are undesirable because they undermine the neutrality (efficiency) of taxation compared to general consumption taxes that tax all goods and services equally. Furthermore, it is important to note that gasoline is double taxed, as it is levied not only as a gasoline tax but also as a consumption tax. Double taxation on the same tax base leads to unfairness and inefficiency. In this light, the gasoline tax is theoretically a prime example of a bad tax.

So why has the provisional tax rate on gasoline been allowed to continue up until now? It is because, under the banner of road-specific revenue sources, the national government has been taking money from where it is easy to collect. The application of the provisional tax rate to gasoline tax was originally triggered by the oil crisis of 1973. The oil crisis caused the economy to slow down, and tax revenues fell sharply, resulting in a revenue shortfall. As an emergency measure, Japan's finances were forced to issue deficit bonds under the Financial Special Act. As part of the tax increase measures, gasoline tax was singled out, and in 1974 the provisional tax rate was applied in addition to the standard tax rate of 28.7 yen (24.3 yen for gasoline tax + 4.4 yen for local road tax). Since then, the tax rate has been repeatedly raised for more than 30 years, and has been maintained and extended, reaching 53.8 yen in 1993 (48.6 yen for gasoline tax + 5.2 yen for local road tax). It is true that gasoline taxes have contributed to infrastructure development as a specific source of revenue for roads, but it can now be said that this role has come to an end.

Modern nations are taxing nations, and so the government must collect the financial resources necessary for its fiscal activities as taxes. When discussing how to raise a given tax revenue in tax reform, the key words are fairness and neutrality (efficiency). From this perspective, a general consumption tax is preferable to an individual consumption tax. Therefore, based on pure fiscal theory, the gasoline tax should not only be a provisional tax rate, but should be abolished altogether. The loss in tax revenue due to its abolition can be made up by raising the consumption tax (general consumption tax), for example. The pending issue of local road construction costs can also be covered as necessary from general financial resources, with an emphasis on efficiency.