From Overseas Press

Drastic tax reform for Japan

(The Yomiuri Shimbun)
Updated: 2010-06-22 10:45

The fiscal 2010 budget is abnormal, with tax revenues falling to about 37 trillion yen (US$407.4 billion), lower than the new government bond issuance, which has swollen to 44 trillion yen ($484.5 billion).

Due to the country's graying population, social security costs, which currently total more than 20 trillion yen ($220.2 billion) a year, will increase by 1 trillion yen every year.

In fiscal 2009, the government's share of contributions to the basic pension payments was raised to 50 per cent from one-third. However, increased contributions are provisionally funded by surplus funds in special accounts, dubbed "buried treasure," and a permanent revenue source of 2.5 trillion yen will be necessary in fiscal 2011 and thereafter.

"Integrated economic, fiscal and social security reforms," as touted by the Kan Cabinet, can only be achieved with stable revenue sources.

However, the income and corporate taxes that have been an important source of government revenues have substantially decreased due to the prolonged recession and a series of tax breaks. Therefore, the last resort is raising the consumption tax, a revenue source that does not fluctuate significantly due to changes in economic conditions and that spreads the burden widely among the public.

The country's 5 per cent consumption tax is exceptionally low compared with 25 per cent in Nordic countries, 16 per cent to 20 percent in Spain, Britain and Italy, and 10 per cent in South Korea.

Sixty-six per cent of the respondents to a Yomiuri Shimbun survey conducted earlier this month said it is necessary to raise the consumption tax rate, greatly surpassing the 29 per cent who said it is unnecessary. Many people lean toward the opinion that a consumption tax hike is unavoidable.

Bones of contention regarding the consumption tax are not confined to such issues as the rate and timing of its introduction. Therefore, wide-ranging discussions will be needed.

The first point is where to spend the increased revenues from the tax hike. A 1 percentage point hike in the consumption tax rate would translate into a tax revenue increase of 2.4 trillion yen ($26.4 billion). If the tax rate is raised to 10 per cent, tax revenues will increase by about 12 trillion yen.

Currently, revenues from the consumption tax are distributed among three fields: the basic pension program, health care for the elderly and nursing care. But Kan has expressed his intention to aggressively invest increased revenues in growth fields such as medical care and nursing industries in order to increase employment.

Using the increased tax revenues to expand government spending without careful consideration may simply repeat earlier mistakes. We believe the consumption tax will have to be spent exclusively for social security services.

Under the current system, 1 percentage point worth of revenue from the 5 per cent consumption tax is allocated to local governments. In addition, a certain portion of the revenue is also provided to local governments as local tax grants. Consequently, the central government can spend only about 7 trillion yen out of the total consumption tax revenues.

Even if the consumption tax rate is raised to 10 per cent, therefore, the central government is unlikely to have enough revenue from this source. The government may have to consider setting the rate at 15 per cent or higher in the future, just as European countries do.

Another issue will be how to reduce the financial burden on low-income earners.

Because the consumption tax is imposed equally on everyone, those in low-income brackets tend to feel more of a burden than high-income earners.

To alleviate this problem, some countries have introduced a system under which consumption tax rates are set lower for food and other daily necessities. Such a system is worth considering in this country as well.

Another option may be to pay tax refunds to low-income earners to cover the cost of the consumption tax they pay for daily necessities. Before implementing such a system, however, it will be an urgent task for the government to consider introducing an identification number system for tax and social security in order to know which households will be eligible for the system.