Japan's Tax Raising Powers May Be Shifted To Regional Governments

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

25 June 2003

Although Prime Minister Junichiro Koizumi has rejected the Tax Commission's proposal to increase consumption tax to 10%, the Japanese leader is apparently open to the idea of letting regional governments set their own levels of consumption tax.

Responding to a question at the House of Representatives Budget Committee meeting earlier this week, Koizumi explained that: "Currently, a part of the 5 percent consumption tax is allocated to local governments. But we have to consider the possibility of allowing local governments to raise or lower the rate of any tax at their own discretion."

At present, 80% of the amount raised by consumption tax is allocated to the state, with the remaining 20% distributed amongst the local governments. It is thought that by allowing local authorities to levy their own (lower) rates, especially in densely populated urban areas, tax revenues will increase due to the high rates of consumption. Conversely, local governments that administer less densely populated areas will have the flexibility to raise consumption tax to make up for the shortfall.

However, according to reports from Japan recently, the government by no means has a consensus on the issue of state and local taxation. Finance Minister Masajuro Shiokawa, for example, is said to prefer the transfer of income and corporate taxes to local governments. Even Koizumi himself may be lukewarm on the idea of letting the localities set their own consumption tax rates, say some observers, especially given his recent statements that the tax would not be raised whilst he is in office.

Nevertheless, the government intends to go ahead with cutting the subsidy it sends to local governments in the form of state tax revenues, and will offset this by transferring some tax raising powers to the regions, be that consumption, income, or corporate tax.

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