The government’s Tax Commission on Friday compiled its basic policy for fundamental tax reform over the medium and long terms, aiming for fiscal reform by securing tax revenues.

The report focuses on future increases in tax burdens, including consumption tax hikes, to sustain Japan’s fiscal balance. It makes no mention of quick tax cuts to spur the economy.

According to the report, tax deductions for individual income and corporate tax breaks should be consolidated or abolished, making way for a system of taxation functioning on a broad-based and equal burden-sharing basis.

The tax panel, headed by Hiromitsu Ishi, president of Hitotsubashi University, submitted the report to Prime Minister Junichiro Koizumi in the afternoon.

Koizumi had instructed the panel to begin discussing tax reform by as early as January, bringing it forward from autumn, as part of his structural reform program.

The proposals differ to those by the Council on Economic and Fiscal Policy, which promotes economic revitalization via tax incentives. And the ruling coalition parties are meanwhile pressing the government to implement tax cuts within this fiscal year.

After submitting the report, Ishi told a news conference, “The Tax Commission and the prime minister shared the same view that Japan’s fundamental tax reform should not lead to short-sighted tax cuts to resolve immediate economic problems.”

The tax reform blueprint, which does not set a specific time frame and is designed to cover the longer term, aims for a taxation principle based on “fairness, neutrality and simplicity.”

The Tax Commission report clearly states the need for future consumption tax hikes to sustain Japan’s fiscal structure — a political taboo avoided since the tax rate was raised to the current 5 percent in fiscal 1997.

Regarding corporate taxes, the report calls for building a “neutral tax system that will not hamper business activities.”

To keep Japan’s tax system consistent with international standards, the report recommends that various tax exemptions and deductions for business be consolidated and scaled down.

It also calls for the introduction of a “pro forma” taxation standard for businesses — based on companies’ size rather than earnings — expanding the tax base by levying firms in the red. Currently, nearly 70 percent of companies are exempt from corporate tax.

By introducing the pro forma standard, the effective tax rate, or total taxes businesses pay for national and local governments, would decline from the current 40.87 percent, according to the report.

On income tax for individuals, the report seeks to resolve what the tax panel called the problem of “the hollowing out of the tax base,” caused by a series of family-related tax deductions.

Currently, about 25 percent of wage earners shoulder no income tax burdens due to deductions such as those related to non-working spouses.

But while the panel aims to expand the tax base by consolidating deductions, it noted that current income tax rates are “extremely low for most taxpayers” and that it is “inappropriate to reduce the rates further.”

Income tax rates are based on a progressive structure of four brackets ranging between 10 percent and 37 percent. Some 80 percent of taxpayers are subject to the 10 percent rate.

The report also calls for the unification of the inheritance and gift taxes to encourage earlier transfers of wealth from the elderly to younger generations.

Due to various tax deductions and exemptions related to inheritance, only 5 percent of inherited assets are subject to taxation. As a result, assets worth tens of millions of yen are often tax-free.

Parents can only pass on assets worth a maximum of 1.1 million yen to their children before being hit with a hefty gift tax. Many parents, therefore, hold onto their assets until their death, thereby allowing the assets to qualify for the much-lower inheritance tax.

Gist of tax reform plan

Following is the gist of the Tax Commission’s proposals for taxation system reforms, as presented Friday to Prime Minister Junichiro Koizumi:

* Raising the level of tax burdens on people is unavoidable.

* A fixed-rate, across-the-board cut in income taxes should be abolished in view of the national economic condition.

* Tax deductions should be consolidated into three areas: basic personal exemption, spousal and dependents.

* The existing special spousal deduction should be basically abolished.

* Further reductions in income and corporate tax rates are inappropriate.

* Preferential tax rates should be limited to priority areas, such as company spending on research and development.

* The “pro forma tax” should be introduced as early as possible as a local tax on corporations.

* The consumption tax should be raised in the future.

* The system that exempts small and midsize business operators from paying the government consumption tax they collect from consumers should be abolished or minimized.

* The inheritance and gift taxes should be integrated.

* A taxpayer identification system should be considered as soon as possible.

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.