Liberal Democratic Party politicians are touting a proposal to allow citizens to divert a portion of their residential tax payment to local governments of their preference. The idea is called “furusato nozei” (tax payment diversion to one’s native place, or hometown) and the Abe administration is pushing it as a way to rectify the financial gap between urban and rural areas. The idea should be viewed as a device to win votes in the coming Upper House election. If put into practice, it would mean a considerable transformation of the nation’s taxation system.

No doubt this idea will be well received in the countryside, which is suffering from an economic downturn and an outflow of population to urban areas. As such, the proposal will attract votes in rural one-seat constituencies, whose election results are likely to influence the overall election outcome.

But it must be remembered that citizens pay residential tax in exchange for public services provided by their local governments. A diversion of tax payments would undermine this structure. Of the 40 trillion yen in tax revenues that local governments are expected to get in fiscal 2007, residential tax revenues will amount to 12 trillion yen, and only a fraction of this figure is expected to be diverted to the countryside.

The central government must look at the larger picture. While tax sources worth 3 trillion yen were transferred to local governments in the fiscal 2004-2006 period, grants-in-aid from tax money from the central government to local governments were reduced by 5 trillion yen, putting a financial squeeze on many local governments. The central government should consider achieving an equitable balance in tax revenues between the central and local governments. One plausible way would be to increase the local governments’ share in the revenues from consumption tax, which now stands at 20 percent of the total.

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