Japanese Tax Policy 'At A Crossroads' Says Tax Panel Chairman

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

23 July 2003

Japan's tax revenues are at present only covering half of what the country is spending on basic public services, the Daily Yomiuri revealed in a report this week. This is a situation which may lead to a sea change in tax policy over the coming years.

Recently, the governmental tax panel, which was given the task of making recommendations for tax policy in the medium to long term, suggested that a substantial rise in consumption tax to at least 10% is necessary in order to help alleviate the burden on the tax system of an increasingly ageing population. However, Prime Minister Junichiro Koizumi has bluntly rejected this idea, announcing that the tax will not be increased whilst he is in office.

Nevertheless, the government's own figures reveal the extent of the problem that the nation is facing over the next two decades. Recent estimates have suggested that the cost of the social security system will balloon from 82 trillion yen in 2002 to 176 trillion yen in 2025. Moreover, the country's debt level, which currently stands at 700 trillion yen ($5.9 trillion) will soon grow to 1 quadrillion yen, according to the head of the tax panel, Hiromitsu Ishi.

Therefore, according to Ishi, Japan finds itself "at a crossroads" in terms of taxation policy, and must face the choice of adopting a more European model of high tax and spend, or the American model of less state interference in the provision of services in order to reduce expenditure. Ishi stated a preference the former, and recommended an increase in the national tax burden from the current level of 36% to nearer 50%, as seen in many European nations.

The tax panel chairman also suggested that a reform of the corporate tax system is needed to generate more income for the government in a time of recession. As corporate tax is levied on company profits in Japan, at present only 70% of firms are paying it. However, Ishi pointed out that even in a period of economic growth, some 55% of firms remain in the red. To counter this, the commission has proposed a tax based on a company's size in addition to its profits, which is due to be imposed from the next fiscal year.

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