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OECD Calls For Large-Scale Japanese Revenue Increases

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

16 April 2015


In its recent economic survey of Japan, the Organisation for Economic Co-operation and Development (OECD) has recommended that the fiscal "arrow" in Prime Minister Shinzo Abe's economic policies will require "large scale revenue increases" in the future.

The OECD foresees that further remedial action is necessary to ensure fiscal sustainability in Japan over the long term. Gross government debt reached 226 percent of the country's gross domestic product (GDP) in 2014, the highest level ever recorded in an OECD country, and, given its continued budget deficit of around 8 percent of GDP, Japan's debt ratio is set to rise even further.

It concludes that "a detailed and credible fiscal plan is essential to put the debt burden on a downward trajectory over the medium term. Any such plan should include fiscal consolidation sufficient to achieve a primary surplus by 2020," as has been promised by the Government.

To achieve that aim, and "although this will tend to temporarily hold back GDP growth," the OECD notes that "raising sufficient revenue will likely require measures to increase receipts from a number of different taxes."

It recommends, for example, further increases in the consumption tax rate. "Even with the planned hike to 10 percent in 2017, Japan's value added tax (VAT) rate would still be the third lowest in the OECD and only about half of the 19 percent average," it notes, and also adds that "it is important to maintain a single rate, relying on more effective policies to address the equity implications of a higher VAT rate."

It suggests that "there is also scope to broaden the personal income tax base, which is relatively narrow. Indeed, less than half of personal income is taxable, reflecting income deductions such as the personal exemption. … Better coverage of the self-employed is necessary for base broadening, but this requires the effective introduction of taxpayer identification numbers that is planned for 2016."

The OECD also points out that the total corporate income tax rate is still the second highest amongst OECD members, even after the recent reduction to below 35 percent. It recommends that "cutting the corporate tax rate and widening its base could stimulate economic activity without necessarily reducing revenues."

As the Government's corporate tax strategy is to reduce the rate below 30 percent over the next few years, it is said to be important that rate reductions should "be revenue neutral, notably by broadening the tax base. In particular, the percentage of firms that pay corporate income tax should be increased from the 30 percent that did so in 2012." In fact, the Japanese Government's 2015 tax reforms have already included a provision in that respect, by reducing the amount of previous losses that can be set off against declared business income.

TAGS: individuals | tax | business | value added tax (VAT) | fiscal policy | budget | Organisation for Economic Co-operation and Development (OECD) | corporation tax | self-employment | tax rates | tax breaks | tax reform | individual income tax | Japan

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