This paper makes a quantitative analysis of changing distribution of local allocation tax in postwar Japan and tries to interpret the results in three aspects such as the introductory process of the welfare state, changes in regional structure during the economic development and horizontal political competition. The distribution is analyzed in the following three steps: 1) share of local allocation tax in total local governmental revenue; 2) share of municipalities and prefectures; and 3) degree of inclined distribution for local governments with small population. These analytical procedures serve to clarify changing intergovernmental relations.
In the early stage of the high economic growth era, the central government gave priority to further economic development and left the fair distribution problem largely untouched. But, as the Japanese economy reached a certain stage of development, the public come to seek an improved quality of life. Following this public opinion, the central government changed its prior policy to provide better welfare services and to reduce various disparities widened in the economic development This change occurred in the mid-1960s.
In public welfare provision, municipalities serve as the most important agents because municipalities directly relate to the daily lives of inhabitants. Therefore rapid progress in welfare provision occurred in the late 1960s and early 1970s, induced an increase in the municipal share in the distribution of local allocation tax. At the same time, the degree of inclined distribution for municipalities with small population was raised sharply to secure sufficient financial revenue for increasing of services.
With changes in the view of the welfare state after the Oil Shock and the following fiscal crisis, most developed countries began to seek “smaller” and “efficient” governments. This movement is well known as the New Right. Japan's national government also followed various policies for reducing public expenditure in the early 1980 s, but it made little reforms in local allocation tax because the ruling Liberal Democratic Party was politically supported by peripheral regions.
With the aging of Japanese society, new needs of welfare provision emerged after the late 1980s. As the result of continuous selective outmigration, the percentage of elderly inhabitants in the peripheral regions became much higher than those in other regions. This led to an increase in the municipal share and more inclined distribution for local governments with small population in local allocation tax, again.
Nevertheless, with the severe fiscal crisis by the long-term depression in the 1990s, it became more difficult for the national government to guarantee each municipality sufficient local allocation tax to meet its increasing fiscal needs. Additionally, urbanites began to criticize the extremely inclined distribution for municipalities with small population.
Finally, the national government changed its stance on local allocation tax and began to drop the degree of inclined distribution for municipalities with small population after 1992. On the other hand, the national government established the Special Municipal Merger Support Law (Shichouson Gappei Tokurei Hou) and gave strong fiscal support to newly merged municipalities. The national government put strong pressure on municipalities with small population through this fiscal squeeze and guiding policy for merger and various merger plans were proposed nationwide.
These contrasts between local allocation tax policies in the early 1980s and after the collapse of the Bubble economy strongly reflect the results of horizontal political competition between urban and rural areas. In particular, the Liberal Democratic Party‚s record defeat of the 1998 House of Councilors election in metropolitan areas accelerated the conversion of the national government‚s local allocation tax policy.