A fair division of tax revenues

In October 2008, the central government started a system of siphoning more than 40 percent of revenue from corporate enterprise taxes levied by prefectural governments and redistributing the money to local governments whose financial footing was weak. The redistribution is done by the internal affairs ministry.

Whether to continue or expand this system has become an issue in discussions of tax reform for fiscal 2014. The central government should realize that this system is an emergency measure and should try to work out a permanent system that will contribute to the stabilization of revenues for local governments and to decentralized administrations.

The redistribution system was introduced because there is a great difference in the amount of tax revenue between urban and rural local governments. Some areas have many large enterprises that bring a great amount of tax revenue. Others do not have such benefits. For example, nearly 40 percent of the nation’s major enterprises and 30 percent of employees are concentrated in Tokyo.

Before the redistribution of the tax revenue, per capita tax revenue in Tokyo was more than three times larger than that of the financially weakest areas.

A panel of the internal affairs ministry recently proposed not only continuing the redistribution system but also siphoning part of the revenue from the corporate resident tax, a local tax, and redistributing it to other local governments.

It must be asked whether expanding the redistributing system is a wise approach. Prefectures where major businesses are concentrated like Tokyo and Osaka oppose the system because they suffer a loss in revenue. Thus the system is causing a schism among local governments. It should also be remembered that the system was introduced as an emergency measure to cope with the situation in which local finance reform pushed by the Koizumi administration resulted in a reduction of some ¥5 trillion in grants from the central government to local governments.

The National Governors’ Association is opposed to the system. The governors of Miyagi, Yamagata, Saga, Tokushima and Tottori have also criticized the system by calling it a “doku manju” (steamed bean-jam bun with poison) that hampers devolution. They say that this system not only fans antagonism between urban and countryside areas but also increases the involvement of the central government in revenue distribution, thus ruining the long-term efforts of transferring revenue sources from the central to local governments. Given such sentiments, the central government should consider abolishing the revenue redistribution system and instead increasing the portion of revenue from the consumption tax that goes to local governments while ensuring a reasonable balance.

The consumption tax, whose rate will be raised from the current 5 percent to 8 percent from April, is less likely than business taxes to be affected by the ups and downs of the economy.

The central government needs to remember that local governments are duty-bound to provide various administrative services to residents and that a stable revenue source is indispensable. As a long-term policy, it should pursue a policy of dispersing economic activities concentrated in Tokyo to other areas.