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The stock market remains mired in a slump. On Sept. 3, the benchmark Nikkei average in Tokyo plunged to yet another post-Bubble low.

Behind the slump are continuing uncertainty over the future course of the domestic economy, Japanese economic policy, and prospects for U.S. share prices.

Individual investors are also confused by a securities-related taxation system that has become too difficult to grasp.

The stock market’s decline over the past decade has prompted the government to make a series of changes to the securities tax and take special measures to promote investment.

However, these measures have only resulted in making the securities tax extremely complicated — too complicated, in fact, for the average potential investor to understand.

This development has been delaying the long-awaited recovery of the stock market, which has destabilized the entire Japanese financial system and endangered the chances of Japan pulling itself out of a 10-year slump.

To correct the situation, the government should first introduce measures to simplify the securities tax. Then it should order a fundamental review of the income tax structure, including financial and securities transactions, over the medium to long term.

Without being constrained by past policy decisions, the government should immediately and radically simplify the taxation of capital gains from stocks or introduce special measures for tax exemptions on a temporary basis.

The government should not wait for the annual tax reform season at the end of the year but instead formulate, as quickly as possible, a system easy enough for the average investor to understand.

Then, over the longer term, reforms should be carried out to give the national income tax a dual structure. The theory behind this proposal is that imposing a progressive tax rate on wage income and a lower, flat rate on capital income will secure neutrality in cross-border capital transfers in a globalized economy.

Under such a system, gains or losses will be calculated in each wage and capital income segment so that a balance will be struck when taxing various financial products.

As the first step, measures should be introduced to allow investors to calculate their profits and losses from investment trust and securities transactions as a combined sum.

Also, to make stocks more attractive as an investment tool and to promote longer-term holding periods, dividends should be covered by a 20 percent withholding tax, like the one that has been imposed on savings interest.

Moreover, for investors who have opened trust accounts or special accounts that free from the burden of declaring taxes, a simpler system should be introduced that imposes a flat 20 percent withholding tax on all their financial income, including dividends, gains from stock and investment trust trading, and bond redemptions.

To introduce these measures, however, a taxpayer numbering system will be essential. I would strongly urge Prime Minister Junichiro Koizumi to make a bold decision on such radical reforms, because they will be needed to pull the stock market out of its ongoing slump.

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