Tax Reform Is The Litmus Test Of Japanese Economic Change

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

04 February 2002

Writing in the Yomiuri Shimbu, Japanese economic guru Yasuhiko Shibata explains why the government should get serious about its much touted tax reform plans - and why there it is likely that one more time rhetoric will win out against reform.

The inevitable clash with the old guard in the Liberal Democratic Party will show just how determined the Koziumi administration is to achieve its goals, says Mr Shibata, who believes that significant economic and social reforms will not be attained without a radical reform of the tax system. He says that the Occupation-era tax collection system has remained virtually unchanged since World War II and has become an anachronistic and perverted "socialist" form of taxation that promotes inequality.

A classic example of this, he says, is the setting of a minimum income below which there is no income tax. On the pretext of extending relief to the poor, legislators from ruling and opposition camps have raised this minimum level each year, finally reaching the point at which a worker on an annual salary of 3.84 million yen or less, living with a spouse and two children, currently has no obligation to pay income tax. Consequently, one-third of salary earners are exempt from income tax. On the other hand, some high-income earners must pay nearly half of their earnings in income tax.

Mr Shibata says: "Tax problems in need of repair are too numerous to mention, but one important fix would be an emphasis on filing individual income tax reports. The present withholding system - in which a company fills out tax forms on behalf of its employees - has dulled the general taxpayer's awareness of taxes. Through the current system, governments since even before World War II have supported a society centered on enterprises rather than individuals."

Despite the obvious need for reform, successive administrations have fiddled about with gimmicky but insubstantial adjustments to the tax system, and Mr Shibata says there are three reasons for this:

• Firstly, Finance Ministry bureaucrats responsible for sketching out tax reforms have always put a high priority on securing tax revenue and balancing its budget with tax hikes and cuts;
• Secondly, the LDP's Research Commission on the Tax System, which wields the real power on tax issues, has succumbed to the influence of special-interest lobbies; and
• Thirdly, the public has scant interest in the tax system, partly because many are bewildered by its complexities. No matter how much money the government squanders, taxpayers are unperturbed because they do not immediately make a link between the money in the state coffers and the tax they pay.

Bureaucrats have failed to reform the tax system, as has the ruling coalition. Both should be excluded from work on mapping out a draft of drastic reform, says Mr Shibata. Members of the Council on Economic and Fiscal Policy must discuss it thoroughly. The prime minister then must summon up his courage, put his political career on the line and present the finished product to the people. The real worth of Koizumi's reforms will depend on whether he will be able to realize tax reform as a lever to help Japan reach maturity as a democratic state and encourage individuals work hard to reinvigorate the economy.

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