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The tax debate sparked by Tokyo Gov. Shintaro Ishihara has reached a milestone now that the metropolitan assembly has almost unanimously approved his plan to impose a new asset-based tax on large banks operating in the capital. The bank tax, which is good for five years and replaces the current business tax levied on income, goes into effect today, the first day of fiscal 2000.

The controversy has left the key issue of “fairness in taxation” unresolved, however. The assembly made it clear that the new tax will cover only banks and that other corporations will continue to enjoy the privilege of tax exemption if they are in the red. Major banks are bracing for a court battle, on the grounds that the new levy violates the Local Tax Law as well as the constitutional principle of equality under the law.

The issue needs to be discussed further, not only by the central government and political parties, but by local governments that face the same question as Tokyo: how to raise their own tax revenues. Of course, it must be considered in the broader context of the tax system and devolution of power. Taxpayers’ participation in the debate is particularly important.

The “Ishihara tax” has received strong support from the general public, and not just Tokyo citizens, because it targets major banks that have lost public favor since the economic bubble. But that is not the main reason we approve of the measure. Rather, the new tax is expected to set an example for other local governments’ efforts to secure new sources of tax revenue. The bank tax can serve as the catalyst for the needed reform of the tax system.

In this sense, and particularly in terms of fairness, the principle of Tokyo’s new corporate tax — changing the basis of taxation from income to a basket of factors such as assets, capitalization, wages and sales — should apply to all corporations, not just banks. From this point of view, the bank tax should be seen as setting the stage for general tax reform. It is not unreasonable to expect major banks to play that role, especially because they have enjoyed large operating profits even in the aftermath of the bubble’s collapse. It is unfortunate if Gov. Ishihara and his tax officials have given up on the idea of extending the new charge to other sectors.

Currently a similar tax is levied on electric-power and gas companies and life and nonlife insurance firms, but reasons for taxation vary according to the nature of the business. In the case of gas and power suppliers, prices are set relatively low because they are regulated by the government. So, if only income is taxed the tax burden will be far too small compared with the scale of business. The insurers are taxed in this manner because their incomes do not include dividends, which account for much of their profits.

In this context, the question is whether banks should also be handled as an exception to the rule. That will be the biggest point of contention if the fairness issue is contested in court. The metropolitan government says banks should be treated differently, not only because they are making big profits and paying dividends, but also because they have received trillions of yen in public money to clear their bad debts. Whether these reasons alone justify special treatment is open to question. Particularly important is whether the infusion of public money has changed the nature of those banks. If it has, a convincing explanation for that will have to be offered in court.

Japan’s postwar tax system was crafted by the late Carl S. Shoup, the American scholar who advocated the “beneficiaries pay” principle for local taxes. On that basis, he recommended an asset-based local tax for corporations — a tax similar to the one adopted by Tokyo. Time and again, the government’s tax commission has tried to set up such a tax, but each time the attempt failed in the face of fierce objections from the business community.

The Ministry of International Trade and Industry, for one, argues that such a size-based tax will sap corporate vitality, noting that France, Germany and some U.S. states have already abolished it. But at the same time, some countries — Italy, for example — have introduced a similar tax.

The debate on local corporate taxation is bound to raise fundamental issues in the tax system, such as how to secure a balance among income, consumption and asset taxes and a sharing of roles between national and local taxes. It will take a long time before any conclusion can be reached. Therefore, the bank-tax dispute is far from over. The matter needs to be discussed thoroughly, with or without litigation, in ways that will help create a more rational tax system.

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