While Prime Minister Junichiro Koizumi is gearing up for tax cuts he hopes will boost the fragile economy, the head of his advisory panel is not shy about expressing skepticism about their effectiveness.
Because of the modest size of the proposed tax cuts, along with the knowledge that hikes to other taxes will follow, taxpayers will probably repay debts or pad their savings with money from the cuts instead of spending and investing more, according to Hiromitsu Ishi, head of the Tax Commission.
“I don’t believe tax cuts are a very effective way to (stimulate) the country’s economy,” said Ishi, president of Hitotsubashi University. “The method of relying on tax cuts has almost reached its limits.”
Earlier this month, Koizumi announced that the government will introduce more than 1 trillion yen in tax breaks that would be targeted at businesses beginning in fiscal 2003. At the same time, Koizumi made clear that the tax cuts should be followed by tax hikes to offset subsequent revenue shortfalls on a multiple-year basis.
Although no formal decision has been made on the tax reduction, it is likely to be smaller than the tax cuts of the late 1990s because the government cannot afford big revenue reductions anymore, Ishi said.
Finance Minister Masajuro Shiokawa recently floated the idea that the tax cuts should be somewhere between 1 trillion yen and 2 trillion yen.
That is less than the tax cuts implemented in fiscal 1998 and 1999, which amounted to 4.5 trillion yen for companies and 4.1 trillion yen for individuals. Despite this 8.6 trillion yen cash injection, the economy continued to falter.
Ishi said one of a few tax options that might stimulate the economy would be to lighten the tax burden for firms that invest in research and development or purchase facilities and equipment.
This method could help promote corporate spending, and could also benefit a wide range of companies, regardless of whether they are profitable, Ishi said.
In contrast, reducing the corporate tax — an idea advocated by some members of the Council on Economic and Fiscal Policy, another government panel — would benefit only profitable firms since the tax is levied only on profitable companies, Ishi said.
“I wouldn’t recommend lowering the corporate tax rate,” Ishi said, noting that only about 30 percent of the country’s companies currently pay corporate taxes.
But any tax cut will only be the first chapter in a major overhaul of the tax code that Koizumi envisions as part of his structural reform agenda. In this regard, Ishi points out, there is little room to maneuver, as the graying population and public sector debt of more than 670 trillion yen weigh on budget writers.
The principal role of the Tax Commission, therefore, is to draw the blueprint for a future tax system that is sustainable and can support the country’s fiscal system.
The commission tends to fall in line with the austerity-minded Finance Ministry since its secretariat job is handled by ministry officials.
In June, the commission came up with an interim report on the future tax system that calls for simplification and tax hikes. Ishi views the tax revision for fiscal 2003 as the “forerunner” of the long-term reform.
For fiscal 2003, Koizumi has instructed the commission to examine five major issues. They include the review of the existing income tax deductions for spouses, which have considerably lowered the income tax threshold, and the introduction of a pro forma standard tax, a local corporate tax that would be imposed even on deficit-running firms.
Ishi said the existing tax system does not suit present social and economic realities, such as the aging population and the increasing role of women in society.
For instance, the individual income tax is based on the idea that the typical family has one income earner — the husband — despite an increasing number of working women.
Another problem arises from the “hollowing out” of the tax system, he said.
“The existing tax system has many holes because of too many tax-cut measures in the past.” He warns that unless these holes are plugged, the country will be left with few options.
Ishi claimed that the public appears to be gradually accepting the need for an increased tax burden in exchange for spending cuts by the government and further administrative reforms.
“Few people demand tax cuts alone,” he said of a recent public hearing on the tax system. “I think the public is aware that the country cannot afford tax cuts any longer.”
So he writes off short-term tax measures, including the proposed 1 trillion yen in tax cuts. But he’s not confident his reasoning will prevail.
“Politicians turn a deaf ear to opinions (in favor of tax hikes) and believe that it is their duty to offer tax cuts.”