In light of the crushing public-debt burden and the rapid aging of the population, there is no question that Japan’s tax system badly needs an overhaul. The government’s Tax Commission, however, has failed to send a strong message that taxes will have to be raised. The impression is that it is unwilling, or perhaps even unable, to take a clear-cut stand on this crucial issue.
It is easy to think that the Tax Commission is sensitive to political concerns, given that the existing tax system was crafted on the initiative of political parties. Of course, politicians are almost always loath to propose tax increases. Nevertheless, by shunning hard-hitting recommendations, the panel does seem to have opted for the politically safe course.
Still, the report, which is the product of extensive discussions and was submitted to the prime minister last week, contains plenty of data and opinions that all point to the inevitability of a higher tax burden. The report pointed out, for example, that the individual tax burden in Japan, when measured as a ratio of national income, is lower than that in any other industrialized country and that spending cuts are far from being sufficient to eliminate the gigantic budget deficit.
The government’s tax advisers paint a somber picture of Japan’s future economic growth, thus effectively rejecting the view that increased tax revenues from an expanding economy will in due course avert the budget crisis. They say this view — which gives the government justification for massive deficit spending — overestimates automatic increases in tax revenues.
The panel assumes that the consumption-tax rate, now at 5 percent, will go up. As for personal income taxes, it hints at a raise in the minimum taxable threshold, which would mean a de facto tax increase for millions of lower-income families. It also leaves the door open to taxation of deficit-running companies.
The commission, however, appears to reject the idea of using the now open-ended consumption-tax revenue exclusively for welfare programs — an idea advanced by some politicians to foot the rising social-security bill. On the other hand, the advisory group supports moves by local governments to expand tax receipts by imposing a new type of assets-based business tax — one similar to the controversial bank tax levied by the Tokyo Metropolitan Government.
Much has already been said and written about all this. So the tax report, its extensive coverage notwithstanding, falls short of expectations. What is particularly discouraging is that it includes bland generalities, such as “the level of the tax burden depends on the level of public services” — this at a time when the public-finance crisis is making tax hikes unavoidable.
The 80-trillion-yen government budget for fiscal 2000 depends on borrowing for nearly one-third of spending needs, with tax revenue amounting to just 50 trillion yen. Nothing short of bold action can clean up this fiscal mess. As always, however, politics stands in the way. As one Finance Ministry official put it, “If we go for that (tax increases), politics will block the way and fiscal reform will go nowhere.”
What the tax panel should have done was make it clear beyond all doubt that taxes must be raised. Indeed, the fiscal crisis leaves no other choice. Such a strong message from the Tax Commission would be a wakeup call to the government and help set the stage for tax reform. Of course, to get the ball rolling, politicians must be brought into the game.
With the government and political parties working in tandem, efforts for reform could get under way in earnest. Calls for higher taxes would inevitably create concomitant pressure to cut nonessential spending and close tax loopholes. Serious attempts in these latter areas would ease public resistance to tax increases as the feeling sinks in that it is, after all, impossible to close the budget gap through spending cuts alone.
The Tax Commission is not a club of armchair tax specialists. Given their prestige and expertise, the panel’s call for a broad public debate on the “tax system as it should be” carries weight. The appeal would have been much more effective had it shown the way to tax reform in unequivocal terms, instead of restricting itself to textbook-like general statements.
The future of Japanese society, especially of the social-security system, depends on how the tax system is restructured. It is no exaggeration to say that 21st-century Japan will decline if it fails to put its fiscal house in order. From this long-term perspective, the latest policy report from the Tax Commission is particularly disappointing.
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