With the country mired in fiscal debt, the government is depending more than ever on finding stable sources of tax revenue.
Following are some basic questions and answers on the Japanese tax system:
How much tax do the Japanese pay?
Overall tax income for fiscal 2010, which ends next March, is expected to come to about ¥37 trillion. That would account for 40.5 percent of the annual national budget. The remainder is mostly financed by government bonds.
According to the Finance Ministry, Japan collects less tax than the other industrialized countries, including Britain, Germany and France.
The ministry’s data show that tax revenue accounted for 24.6 percent of Japan’s total income in fiscal 2007, compared with 30 to 38 percent in Britain, Germany and France in calendar 2007.
Analysts, however, say the tax burden should not be judged merely in percentage terms because the efficiency with which each country spends that revenue must also be taken into account.
Is the corporate tax high?
Yes, and whether to cut it is a key topic in the government’s annual tax review for next fiscal year.
The Japan Business Federation (Nippon Keidanren), the country’s biggest business lobby, has been pushing for a corporate tax cut, claiming the high rate levied on Japanese companies puts those operating globally at a competitive disadvantage.
Keidanren also argues that the government relies too heavily on corporate tax revenue and that the consumption tax, at 5 percent, is too low.
In response, the government is reportedly examining the idea of cutting the combined corporate tax levied by the central and local governments, which effectively stands at 40 percent, by 10 to 15 points for about five years to boost foreign investment.
According to the Finance Ministry, the tax rate exceeds that of Europe and other Asian nations.
For instance, France levies a combined tax rate of 33.33 percent on businesses, while Germany charges 29.41 percent, Britain 28.00 percent and South Korea 24.2 percent, it said.
Will the consumption tax be raised in the future?
It only seems to be a matter of time before the 5 percent sales tax is hiked to pare down the massive fiscal debt and growing welfare costs in this rapidly graying nation.
Political attempts to raise the issue only result in voter fallout.
Prime Minister Naoto Kan vocally campaigned about debating a sales tax hike to around 10 percent but has since toned down his comments after the coalition government led by his ruling Democratic Party of Japan lost its Upper House majority in July.
At present, Kan is only calling for “active debate” on tax reform to finance ballooning social security costs.
Assets can be transferred from one generation to another, but how much inheritance tax do people pay every year?
Japan is famous for its high personal savings. In 2001, the most recent year for which data were available, total inheritance tax revenue stood at ¥1.48 trillion paid by the heirs of about 46,000 ancestors out of the 970,331 people who died that year, according to the National Tax Agency.
Inheritance tax is payable on assets of more than ¥50 million, with a variable tax rate ranging from 10 to 50 percent, depending on the amount.
Inheritance and gift taxes were in the spotlight recently after former Prime Minister Yukio Hatoyama was accused of dodging taxes on political funds provided by his mother.
Hatoyama, a political blue blood whose grandfather, Ichiro, also was prime minister, at first claimed he was unaware his mother was contributing tens of millions of yen every month. But in December, he said he paid gift tax of about ¥600 million.
A gift tax is levied when monetary gifts exceed more than ¥1.1 million a year, with the rate ranging from 10 to 50 percent, depending on the amount.
In fact, the government has decided to offer tax exemptions to promote the transfer of assets from older generations, who generally have considerable savings, to younger ones to help revitalize the economy. Personal assets, most of which are in the form of savings, stood at ¥1.445 quadrillion as of June.
The most recent step is a gift tax deduction of up to ¥15 million this year to prompt offspring to spend money given to them by their parents to acquire real estate for housing.
Why did the tobacco tax rise?
Amid swelling budgetary deficits, the government decided last year to raise the tobacco tax for the fourth time this decade to secure more revenue without inflicting too much pain on the ailing economy.
Accordingly, the government raised the tobacco tax by ¥3.5 per cigarette on Oct. 1. This pushed up the price of a pack of popular Mild Sevens to ¥410 from ¥300. It was the biggest tobacco tax hike on record.
More than 60 percent of that ¥410 will go to the national budget.
Tobacco has been a big source of tax revenue for the government, which began monopolizing tobacco sales and charging a tobacco tax in 1898. The launch was aimed to improve the country’s fiscal health after the costly Sino-Japanese War of 1894-1895.
The state monopoly ended in 1985, when the national company, Japan Tobacco, was partly privatized.
Ahead of the Oct. 1 tax hike, smokers lined up to buy cartons of cigarettes, boosting overall domestic tobacco sales in September by 88 percent from a year earlier.
The steep hike in price also pushed some smokers to quit.
Why are there so many beerlike beverages here and why is the liquor tax so complicated?
As with tobacco, there has been a series of hikes to the alcohol tax as authorities target new drinks specifically developed by brewers to dodge the high taxation on beer.
By law, beer — which is defined as a fermented beverage comprising water, hops and at least two-thirds malted barley — is taxed at ¥220 per liter.
In 1995, brewers introduced low-malt “happoshu” (literally “foaming liquor”) to the market as a cheap alternative to beer. Since happoshu was taxed at a lower rate and was therefore cheaper, sales surged.
But the brisk sales in time led to a higher tax on happoshu. That rate currently stands between ¥134.25 and ¥220 per liter, depending on how much malt the products contain.
Next, brewers developed so-called third-category beers, which make use of malt alternatives like pea protein, soy protein, or soy peptide.
Since these beverages do not use malt as a raw ingredient, they also fall into a different category and thus are taxed at a lower rate, even after the tax on them was hiked in 2006.