Taxation Measures against Natural Disasters

This paper discusses tax policy issues arising in the context of natural disasters. Ideally, tax policies, together with various regulations, should be used as an ex-ante tool to provide proper incentives to achieve the optimum behavior of people, which minimizes total social costs of natural disaster, leaving distributional issues for social security and social welfare systems. However, it is actually impossible for politicians to refrain from helping the affected people by providing tax relief, subsidy, and public works in the affected regions, even if the ex-post relief distorts incentive of people and local municipalities to prepare for natural disasters. In Japan, a large part of Government budget after natural disasters are used for public works. While it is necessary for the Government to recover the public infrastructure destroyed by natural disasters, it is not the best policy to support people by providing them with public housing located in the affected regions, causing misallocation of resource. It is better to provide tax relief and pecuniary assistance, such as subsidy for housing expenditure, from the viewpoint of efficiency and of welfare of affected people. The possibility to use tax relief after natural disasters can be explored as a second best policy