A modern tax system was established in Japan approximately 20 years after
the Meiji Restoration (1868), when Japan emerged from feudalism. Until that time the Japanese tax system had relied mainly upon land taxes, which repre- sented more than 80% of all tax collected. Rapid development of a capitalism economy in the Meiji period brought about broad changes in the tax system. An income tax system was introduced in 1887, making Japan one of the first countries to adopt an income tax system with modern features. However, since economic development was still at an early stage, income tax played only a minor role in total tax revenue (1.5% in 1888); the number of people paying income tax was only 118,600 out of a total population of 39 million, while land tax still accounted for more than half of the aggregate tax revenue (53.8% in 1888As the modern tax system developed in Japan, the importance of land tax for revenue decreased steadily. This trend continued until 1940, when the income tax system was expanded and the indirect tax system was modernized.
Supported by an increase in national income and improved administration, the income tax system gradually evolved: provisions of the tax law were more precisely defined, the number of taxpayers increased, tax revenue grew gradu- ally, and the importance of income tax in national finance increased. Until 1908, land tax was the main source of national tax revenue. Indirect taxes, of which the liquor tax was the most important, expanded gradually. Since 1935, income tax has been the most important single item in tax revenue. Major changes up to World War II included: