A basic agreement reached earlier this month by the three ruling parties on fiscal 2001 tax code changes is a case of being unable to see the forest for the trees. Their myopia distorts an overall tax review and undermines the basic principles of taxation: fairness, neutrality and simplicity.
The agreement, put together by the Liberal Democratic Party, New Komeito and the New Conservative Party, lacks a long-term outlook for a 21st-century tax system. With an Upper House election scheduled for next summer, it focuses on politically palatable measures, such as expanding family gifts that are nontaxable and extending tax breaks for home loans.
The tax system needs an overhaul to reduce the heavy public-debt burden, the nation’s most formidable fiscal problem. Yet the tripartite tax talks apparently breezed along as if the problem never existed. There was, by all indications, no sense of crisis, no strong determination to rewrite the tax code. It was deja vu all over again — the ruling parties tinkering with the tax system to suit the needs of their administration.
The coalition parties say tax changes for fiscal 2001 are aimed chiefly at economic recovery. They propose, for example, increasing the tax-free portion of family gifts from 600,000 yen to 1.1 million yen a year. It is difficult to think, however, that such a measure will stimulate consumer spending. On the other hand, they shelved plans to cut the maximum inheritance tax rate, presumably on the grounds that such a tax break would benefit only a handful of wealthy people and therefore would not do much to boost consumption.
The LDP’s push for a donation tax cut may have something to do with the fact that many younger politicians are elected to the Diet by succeeding their retired or deceased fathers. The proposal to extend the preferential tax measure for capital gains from share sales also seems designed to benefit selected people — big investors in the stock market.
LDP tax officials reportedly say that selective tax breaks have been proposed as an alternative to broadly based tax cuts, which are impossible at this stage because of the huge budget deficit. That is a dubious explanation, in the sense that expediency is inimical to tax reform.
The coalition tax agreement has some redeeming features. Consider the plans to introduce “green taxes” for motor vehicles and tax breaks for nonprofit organizations. These are positive upgrades to the tax code. It should be noted, however, that Japan still lags behind the United States and Western Europe in the realm of environment-oriented taxation.
These welcome measures, however, pale in comparison with the failure, or reluctance, to address the overriding question: What changes are needed to overcome the fiscal crisis? The government already has a budget deficit of roughly 30 trillion yen — the difference between total expenditure (over 80 trillion yen) and tax revenue (50 trillion yen). Economic recovery, to be sure, will bring in more tax revenue, but probably not much. To resolve the deficit problem, tax increases are unavoidable.
There is no evidence, however, that the ruling parties tackled this problem. They conveniently put this political hot potato on the back burner. A reduction in the minimum taxable income — a proposal put forward by the opposition Democratic Party of Japan in the last general election — was also put aside. This is a matter that should be considered not only as a means of expanding the tax base, but also from the standpoint of fairness in taxation.
The coalition parties, moreover, avoided even a requisite discussion of long-standing problems in the current consumption-tax system, such as loopholes that allow shopkeepers to pocket some of the 5-percent tax paid by consumers. Plans to levy a new local tax on corporations, including those in deficit, were also put off. Moves by local authorities to expand their own tax revenues elicited only vague responses.
This pattern of expediency and inaction — making stopgap changes while postponing solutions to difficult problems — seems to reflect a lack of strong and farsighted leadership. Finance Minister Kiichi Miyazawa’s seemingly aloof statement on the budget crisis — that he believes the public “understands” the need for a higher tax burden — sounds more like a comment by an economic pundit, not by a political leader.
As the nation’s chief economic manager, Mr. Miyazawa ought to speak more forcefully, and more specifically, about what should and can be done to put the country’s fiscal house in order. The same goes, if to a lesser degree, for the tax experts of the ruling coalition. The government and the ruling parties need to explain in plain language how they are going to restore balance between spending and revenue.
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