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Tokyo Gov. Shintaro Ishihara has presented to the Metropolitan Assembly a bill that would impose a temporary tax on all funds held by major banks operating in the metropolis. The proposed tax, the first of its kind in Japan, stirred mixed reactions nationwide. The Japanese Bankers Association issued a statement expressing strong opposition to the tax. The governor’s abrupt proposal raised problems with the principles of taxation and with industrial policies.

I support Ishihara’s proposal as a challenge to the snail-paced progress in the transfer of power from the central government to local governments and in basic tax reform. Ishihara demonstrated true political leadership in making the proposal.

Local governments carry out two-thirds of the nation’s public-service activities, but have only one-third of the nation’s total revenue sources. On the other hand, the central government implements only one-third of such activities while controlling two-thirds of the revenue sources. The central government’s tax grants and subsidies make up for the difference. This mechanism distorts local autonomy because it arbitrarily transfers financial resources from urban to rural communities.

As a candidate in the 1999 Tokyo gubernatorial election, I emphasized repeatedly in television debates and other forums that the establishment of local authorities’ rights to impose taxes independently was essential to restore the nation’s fiscal health. In my 1999 book listing my election pledges, I made the following proposals:

(1) A higher proportion of the consumption tax should be collected by local authorities.

(2) A tax on corporations on the basis of their size should be introduced.

(3) Restrictions on bond issues by local governments should be relaxed.

(4) The central government’s licensing system for ordinary taxes outside the tax law should be abolished.

(5) A system that would make it possible for residents to seek the establishment of local tax ordinances should be introduced.

During the election campaign, these proposals were branded as too esoteric and long-range by other candidates, who called for the selling of superfluous public buildings and the suspension of large development projects in the Tokyo Bay area. My proposals were not even taken up for discussion in televised debates, due in part to the program moderators’ inability to understand them.

However, makeshift policies lacking a long-term perspective would not be conducive to the establishment of local autonomy and the restoration of fiscal health in local administration. As an advocate of local autonomy, I am pleased that Ishihara tackled this problem.

To be sure, Ishihara’s proposal is fraught with problems. First of all, it is lacking in neutrality and fairness. Why does the proposal target only banks, and only those with assets of 5 trillion yen or more? Banks have taken the brunt of public criticism after receiving a large amount of public funds for their bailout. Ishihara was politically clever in targeting them, but he cannot evade criticism for his populist strategies.

The proposed tax should target all industries nationwide. Otherwise, the new tax in Tokyo could cut into the revenues of the central government and other local governments since the banks would be able to claim the payments as nontaxable overhead. This could stir charges that Tokyo’s taxation policy is selfish.

In addition, taxing banks on the basis of assets could impede the reorganization of the banking industry. The proposed tax would not be helpful, either, to a Japanese plan to establish Tokyo as a major international financial center. An increased tax burden on banks, at a time when the Japanese economy is emerging from the doldrums, could retard economic recovery. In addition, it could erode the banks’ international competitiveness. The timing of the proposal is doubtful.

In my book listing my election pledges, I wrote that it would be politically difficult to introduce a temporary tax on corporations on the basis of their size, at a time when the economy is in recession (as it was then). The tax should be introduced after economic recovery is on track.

The tax revenues of prefectural governments ebb and flow because most of them are based on corporate income, which is subject to business cycles. Local governments, whose expenditures are more or less constant, have problems with the stability of tax revenues. It is also unreasonable that local taxes are based on the ability-to-pay principle, instead of the benefit principle. Corporate-tax revenues are concentrated in prefectures that have a major industrial presence, and this contravenes the “principle of universality.” A tax based on the size of corporations is necessary to solve these problems.

The question is what should be the basis of taxation: area of company property, capital, size of work force, sales or added value (income plus salaries, interest and rents on land)? Additional issues include the cost of paying taxes, relations with other local taxes and the taxation of smaller companies.

The government’s Tax Commission has held discussions on these issues. A subcommittee report said a tax based on the size of corporations should be part of a major tax reform and should be introduced as soon as possible. However, there had been no moves to introduce the tax.

Ishihara’s proposal was important as an attempt to expedite the central government’s foot-dragging on policy implementation. Discussions of problems with the proposal may be necessary, but the proposal gives the central government an opportunity to introduce a similar tax nationwide. Without political dynamism, reform will be impossible.

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