Editorials

Patchwork steps in government's 2019 tax reform

The fiscal 2019 tax reform outline approved by Prime Minister Shinzo Abe’s ruling coalition features measures to alleviate the anticipated negative impact on consumer demand from the consumption tax hike to 10 percent next October, such as automobile and housing-related tax cuts. These and other steps taken by the government as it prepares for the next hike are aimed to avert a repeat of the last consumption tax hike in April 2014, when the hike from 5 percent to the current 8 percent caused a steep fall in private consumption and nearly derailed the nascent recovery. While some steps may need to be taken to ease the added burden on households to ensure a smooth implementation of the tax hike, heavy fiscal measures could raise doubts over the very purpose of raising the consumption tax.

In addition to the tax cuts, the government has already adopted a package of measures to underpin consumer demand, including the offer of a 5 percent reward-point rebate to consumers for purchases made via cashless methods such as credit cards, as well as shopping vouchers with enhanced purchasing power — whose costs will be paid for from state coffers. Altogether, the cost of these measures could offset a large portion of the additional revenue from the consumption tax hike.

The consumption tax hike is supposedly meant to help cover the ballooning social security expenses of the aging population and thereby contribute to rebuilding the nation’s fiscal health. But of the estimated ¥5 trillion in fresh revenue from the hike, it has already been decided that ¥2 trillion — originally intended to repay government debts — will be diverted to policy spending such as financing free preschool education. In addition, the rate on daily necessities such as food and beverages will be kept at 8 percent so as to ease the household burden. All in all, the net increase in the burden on households is expected to be about a quarter of what took place with the last hike in 2014. If fiscal steps still need to be taken to offset the impact of the tax hike, questions may arise as to why the consumption tax needs to be raised now.

The tax reform package for fiscal 2019 also calls for substantially redistributing — from Tokyo to other parts of the nation — the revenue from corporate taxes paid by firms to local governments. The measure is said to be intended to correct the steep gap in such tax revenue — which tends to concentrate in big metropolitan areas that attract large numbers of companies — between prefectures. In a comparison of per capita revenue from the two types of corporate taxes paid to local governments over the period from 2013 to 2017, Tokyo had six times more income than Nara, which was ranked at the bottom among the nation’s 47 prefectures. That disparity is much wider than the maximum gap in terms of revenue from individual residential tax (2.6 to 1) and fixed asset tax (2.3 to 1).

According to the outline, the national government will absorb roughly one-third of the prefectures’ income from one of the local corporate taxes and redistribute the revenue to them according to their population size. Tokyo, whose income from local corporate taxes had already been reduced by some ¥400 billion in a similar step taken several years ago, will again face about ¥420 billion in cuts to its tax income, to be redistributed to other prefectures. As a result, the gap between Tokyo and Nara will be narrowed down to around 3 to 1.

Steps to narrow the gap in tax revenue between prefectures may be inevitable to a certain extent in order to prevent disparity in administrative services between rich and poor regions. At the same time, excessive redistribution of revenue from Tokyo to other prefectures could run counter to the principle of local autonomy — that local autonomous bodies are to cover their expenditures out of their own tax revenue. There already is a mechanism in which the national government redistributes its own tax revenue to prefectures and municipalities to adjust their revenue shortfall. Adding to these mechanisms can also complicate the tax system and make it harder to understand from the viewpoint of taxpayers.

Behind the problem of a steep regional gap in tax revenue is the heavy concentration of business activities in large metropolitan areas, in particular in Tokyo. A fundamental solution to close the gap should be to disperse the concentration by encouraging firms to move out of the Tokyo area to other parts of the nation, or to promote entrepreneurship in areas that face the tax revenue shortage. As part of its regional revitalization campaign, the government has for years been urging businesses to move their headquarters functions out of Tokyo by offering tax incentives. However, progress on this front has been sluggish as a tide of people and business activities continue to pour into Tokyo. The government needs to realize that the planned measure will not fix the problem at the root of the tax revenue gap.