The government has tackled tax reform as a means of beefing up Japan’s economic vigor, cutting corporate tax rates and introducing cuts specifically aimed at promoting research and development projects.
However, we must not forget that social security costs have become an increasingly heavy burden on both corporate and individual finances in recent years. Social security costs are expected to rise further as Japan’s population continues to age and its birthrate continues to decline.
Any attempt to cover those costs with a corresponding hike in pension and health insurance premiums would not only offset the positive effects of tax reform, but seriously damage the nation’s economic vitality as well. Therefore, future debate on tax reform must proceed with both the taxation and social security burdens in mind.
For the nation to maintain its vigor, the combined tax and social security burden for the public should not exceed 50 percent of income. Today, the potential total burden borne by the people, which also includes the mounting government debt, has already reached 47.1 percent of their salaries. To prevent the figure from shooting above 50 percent, a comprehensive reform of the tax, fiscal and social security systems is essential.
First of all, the national and local governments are required to substantially cut their expenditures through full-scale administrative and fiscal reforms. In particular, a fundamental review of the pension and other social security programs is needed so the premiums can be contained at levels that won’t harm the nation’s economic strength.
But even if government spending is streamlined and social security reform is pursued, the nation’s overall fiscal demands will inevitably grow along with the aging of the Japanese population. In financing the rising costs, the government should avoid hiking social security premiums and income and corporate taxes, and instead turn to the consumption tax, a burden that will be shared broadly by the public and have less negative impact on the economy when hiked than increasing direct taxation. In the initial phase, a 3-percentage-point hike in the consumption tax will be necessary to cover the rise in the government’s share of the basic pension cost. Further hikes will be necessary in the future, but spending must be streamlined simultaneously, and the tax rate should be kept at a level of around 18 percent by 2025.
The government should take further steps by reforming the core portions of the corporate tax code, such as the depreciation system, the handling of corporate losses, and tax measures for restructuring businesses.
Given the rapid aging of the nation’s population, any delay in government action will make it even more difficult to deal with the situation. The government must act quickly to tackle the reforms needed.