An advisory panel to the prime minister on Friday called for a radical overhaul of the tax system that would potentially involve tax hikes in order to tackle problems related to the aging population and get rid of the government's debt.
In the recommended medium-term policy package, the Tax Commission indirectly suggested that the 5 percent consumption tax be raised in the future to avoid passing the current generation's tax burden on to future generations.
| Gist of Tax Commission report * The current generation should not pass its tax burden onto future generations. * Spending cuts should come before tax hikes to reconstruct the public finance. * The personal income tax should not be cut any further. * The progressiveness of the personal income tax should be maintained at the current degree. * The consumption tax will be increasingly important in the tax system, and the current rate of 5 percent is at the lowest level among major industrialized countries. * The minimum taxable income threshold should not remain overly high. * There is no room left for further cuts in corporate taxes. * A new size-based local business tax should replace the current income-based one nationwide at an early timing, depending on economic conditions. * The inheritance tax should be imposed more broadly, but the maximum rate should be lowered from 70 percent. |
The panel also said the personal income tax should not be reduced any more, indicating the need to tax more people with lower incomes.
While it ruled out any further cuts in corporate taxes, the panel proposed that the local business tax be replaced soon by a new system that would tax even loss-making firms.
Hiroshi Kato, the panel head and president of Chiba University of Commerce, handed the report of nearly 400 pages to Prime Minister Yoshiro Mori.
The report -- titled "The Current Situation and Future Agenda on the Nation's Tax System" -- is the first medium-term package in three years and one of the most comprehensive in the past few decades, a Finance Ministry official said.
Officials mainly from the ministry wrote the report based on the panel's discussions. The 30-member panel is made up of academics, businesspeople and other individuals appointed by the government.
Although there is no guarantee that all the recommendations will materialize, the ruling Liberal Democratic Party's own tax panel has traditionally made annual tax revisions basically in line with the government panel's reports.
The latest report calls for spending cuts before any tax hike to reconstruct the government's finances, which it says have declined to a critical level.
The report examines a wide range of national and local taxes. It expects the consumption tax to be increasingly important in the graying society because its burden is not concentrated on the working generation, saying
exemptions should not be expanded.
The report effectively points to the need to raise the consumption tax. It states that the current 5 percent rate is at the "lowest level" among major industrialized countries, adding that the current generation should bear the burden of public services and not pass it on to future generations.
The report, however, stops short of saying when or by how much the tax should be increased.
It also says its single rate system should be maintained for simplicity, unless the rate becomes double digit, like value-added taxes in Europe. The report is thus opposed to setting a lower tax rate for food -- a measure that would ease the burden on people with lower income.
The report is signaling caution about using consumption tax revenues solely for social welfare spending, saying it might make the government's fiscal management inflexible.
The personal income tax should continue to play the central role in Japan's tax system, the report says, stating that a series of one-time tax cuts and systematic reductions has already "hit a limit."
No more cuts in the income tax should be carried out, it suggests, because Japan's income tax burden is already at the lowest level among major economic powers and because of the fiscal crisis.
The report says the minimum taxable income threshold should not remain overly high, effectively suggesting more lower-income people be taxed. Various deductions -- which collectively make up the threshold -- should thus be reviewed for consolidation, it says.
At present, a couple with two children with an annual income of 3.84 million yen or less are not subject to income tax.
The progressiveness of the personal income tax -- higher tax rates for people with higher incomes -- should be maintained at the current degree for its income redistribution function, according to the report.
On national and local corporate taxes, it says there is no room left to lower taxes, because the combined effective rate has come down to 40.87 percent, almost the same as in the United States.
That aside, a new size-based local corporate tax should replace the current one nationwide as soon as possible to stabilize prefectural governments' revenues and ensure the principle of fair taxation, the report says.
The base of the proposed tax would be the total value of corporate activity -- a combination of profits, aggregate salaries for employees, interest payments and rent -- and thus applicable to even loss-making firms, which account for more than 60 percent of all Japanese companies and are now exempt from paying taxes.
A version of the proposed local corporate tax is the bank tax launched in April by Tokyo Gov. Shintaro Ishihara. The Tax Commission has criticized Ishihara's tax as discriminatory, and the issue is briefly mentioned in the report.
The panel also said the inheritance tax should be imposed more broadly but its rate should be lowered from its current 70 percent ceiling.
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