The government’s Tax Commission is discussing the fiscal 2005 revision of the tax system. The focus this time is on the decrease or abolition of the fixed reduction for individual income and resident taxes, which was introduced in 1999 as an economic-stimulus measure. Rather than draw the line there, the commission should undertake a comprehensive revision of the income tax.
A yearly revision of the tax system is relevant, but the government should not play around with the system in response to its immediate requirements and conditions. The revision should be seen as a chance to take a step closer to a more desirable tax system. One of the main topics for discussion by the Tax Commission is the fixed tax reduction for the income tax, by which the initial tax payment calculated according to the progressive tax rate is cut by 20 percent.
The fixed tax reduction for the income tax was introduced as a temporary measure that would be removed when the economy entered the stage of recovery. The mainstream opinion in the commission is that, in view of the present economic situation, the time has come for its abolition. The commission is considering a two-phased method, by which the fixed reduction would be reduced by half next fiscal year and then abolished in fiscal 2006. We agree with this approach.
Some people in the ruling parties and business circles oppose the abolition, arguing that the economic outlook remains unclear or that personal consumption still lacks strength. To this we ask how often have such opportunistic views hindered true reform of the tax system up to now? As a temporary measure, the fixed tax reduction should be abolished as soon as possible. The resulting extra revenue can be used to raise the national Treasury’s basic pension.
The fundamental principles of the tax system are fairness, simplicity and impartiality. The meaning of impartiality is, for example, that the government of the time should not be allowed to tamper with the system out of pure opportunism — such as implementing patchwork changes aimed at stimulating economic activity. The fixed tax reduction measure was introduced in response to an economic crisis triggered by the collapse of financial institutions. To an extent it was unavoidable. But we should not forget that it was originally intended to be just a temporary measure.
Japan’s progressive income tax rises in four stages from 10 percent to 37 percent. Combining the highest tax rate and the various deductions and so on that are available, Japan actually has one of the lightest tax burdens among the developed countries. The ratio of individual income tax to national income is about 6 percent, which is remarkably low compared with the figures of Western countries, which easily top 10 percent.
As a result of the easing of the progressive stages, gaps have appeared among income groups. The Gini coefficient indicates the degree of fairness in income distribution. (The closer this coefficient is to 0, the fairer; the closer it is to 1, the more unfair.) For pretax income in Japan, the coefficient was 0.43 in 1990, but by 2002 it had risen to 0.49. For income after taxes, including income tax, fixed asset tax and so on, the figures also increased from 0.42 to 0.49.
In other words, the redistributing function of tax to standardize income is no longer working. It was because this redistributing function once worked that Japan had such a large middle class for a long time after the war, but recently there has been a change in the situation.
The government of Prime Minister Junichiro Koizumi insists that those who make an effort should be rewarded, and therefore approves the widening income gap. Minister of Economic and Fiscal Policy Heizo Takenaka has said that “vitality” should be added to the principles of the tax system and has suggested that polarization should be promoted. They sound as if they are arguing that people have low incomes simply because they do work hard.
To secure fairness in taxation, and in view of the present situation in which the nation has a huge fiscal deficit because of the shortage of tax revenue, the government should consider measures such as raising the highest tax rate and abolishing the deductions that are limited only to high-income earners. At the same time, in order to broaden the taxation base, efforts should be made to lower the minimum taxation level, which would make up for the abolition of the special reduction for spouses that was implemented in the current fiscal year. This would take us a step closer toward a balanced income-tax system in which the nation’s burden is shared more fairly.
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