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Tax reform will offer Japan realistic chance to revitalize economy

by Yoshio Nakamura

The government’s Council on Economic and Fiscal Policy is scheduled to set the direction for tax reform by the end of June. Since its establishment last year, the council has set out guidelines for structural reform in fiscal, social security and other fields, but not much has been discussed about the tax system — the cornerstone of economic policy.

Therefore, expectations are high the panel will compile plans for a fundamental reform drive that will go beyond mere technicalities and pursue the grand objective of pulling the Japanese economy out of its prolonged slump.

Traditionally, it has often been said that a tax system must be fair, neutral and simple. However, I must point out that Japan’s tax system has been biased in favor of the principle of “fairness.”

Also, the principle of “neutrality,” which in its original meaning dictates that a tax’s negative impact on the economy must be kept to a minimum, appears to have been interpreted in this country to mean that the tax system should have neither good nor bad impacts on the economy.

The Japan Federation of Economic Organizations (Keidanren) is trying to change this concept and is proposing that the government put the emphasis on using tax reform to revitalize the economy.

Measures to stimulate individual and corporate vigor through tax reform will include introducing a flatter structure for income taxation rates and lowering marginal rates that could hinder economic activity. These measures reflect a global trend and will be essential as the nation attempts to prevent the hollowing-out of its domestic industries and talent, and to lure investment and market participation from abroad.

On the other hand, the resources necessary to secure fiscal discipline should be obtained through thin taxes widely imposed on the people.

There is also room to maneuver on specific tax measures. For example, expanding tax credits to promote housing investment, or reviewing real estate taxes to spur greater liquidity in the land market, would both be helpful in dealing with deflation.

In addition, tax measures to encourage corporate investment will be essential. As the industrial sector tries to regain its vitality, companies must actively spend money on R&D, new plants and equipment, or sophisticated IT systems. But given the current uncertainty over the course of the Japanese economy, many companies are hesitant to pursue aggressive investment, which will in turn keep the economy in the doldrums. A shove from tax reform is needed to halt this vicious cycle.

The tax system is the most important structural reform goal being advocated by Prime Minister Junichiro Koizumi. What we need is quick and decisive action by the government.