Japan Ponders Tax Cuts To Stimulate Economy

by Mary Swire, Tax-News.com, Hong Kong

05 April 2002

Even though Japanese public debt is nearly 140% of GDP and the budget deficit is about 6% of GDP, with tax meeting only just over half of government expenditure, so that increasing the tax take is a long-term necessity, the government is considering tax cuts as part of a range of emergency measures to stimulate the economy.

Since the government of Junichiro Koizumi has laid great emphasis on restoring balanced budgets, and has promised to freeze spending and to cap bond issuance at Y30,000bn, finance minister Masajuro Shiokawa has no weapon other than tax cuts to bolster corporate investment and private consumption.

In a recent interview, Heizo Takenaka, the economy minister and an influential member of Mr Koizumi's economic advisory council, said he was sympathetic to the idea of short-term tax cuts, followed by longer-term tax increases. One idea floated by economists is to cut sales tax but then to raise it significantly over coming years.

Such proposals were attractive in theory, but difficult to implement, said Mr Takenaka. "It is easy to promise tax cuts now and a tax rise later but it's definitely difficult politically," he said. "The second best choice is to provide a very stable tax system. That's my current idea. We need a very robust, credible, stable tax system, of course considering the incentives of the private sector."

While arguments in the government and the ruling coalition over the issue of tax reform intensify, confusion is growing. Those involved in the debates can be broadly divided into three groups: the government's Tax Commission, which focuses on fiscal principles; the Council on Economic and Fiscal Policy, which attaches importance to the reinvigoration of businesses and the economy; and the Liberal Democratic Party's Commission on the Tax System, which tries to curry favor with industries while holding fast to vested rights and voters.

Influential researcher Yasuhiko Shibata says that the government should immediately reduce the 5% consumption tax to zero for the next six months as a short-term measure to spur demand and combat deflation. It should then try to realize an equitable tax burden by boldly cutting income tax rates in half and hiking the consumption tax to 15% from the next fiscal year.

Says Shibata: "Furthermore, over the long term, the government should review corporate tax, which 70 percent of enterprises escape. It is also imperative that the government simplify the convoluted and unfair tax system by abolishing tax breaks for small and midsize businesses, which are exempt from the duty of handing over their consumption tax.

"Taxation reform, unlike a number of other reforms, is not only a historically major undertaking but also vital to Japan. If Koizumi has the courage to stake his political career on radical changes to the way tax works, he will earn a place of distinction in history."

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