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Monday, May 22, 2000

Ishihara tax reflects paralysis caused by national tax scheme

The new size-based tax on big banks that has been introduced by Tokyo Gov. Shintaro Ishihara is causing major repercussions and prompting Osaka Prefecture to consider a similar tax.

However, moves like these are also prime opportunities to examine the way local governments are managed.

In Japan, public-sector revenues are disbursed to the national and local governments at ratio of 3-to-2, while expenditures are saddled at a ratio of 2-to-3. This is because the state passes down a portion of its national tax revenue to them as grants and subsidies.

This practice has blurred the relationship between taxpayers and their benefits, which are proffered by prefectures and municipalities as public services.

In particular, tax grants are being provided to make up for the chronic revenue shortage being suffered by many local governments. This is a fairly convenient system for local administrators, because no matter how much they spend, the state will cover the costs.

This means local government chiefs do not have to rack their brains over ways to secure funds for their projects. In fact, the more they spend, the better they will be favored by the local electorate.

Why? Because it is not local residents who are paying the cost, but taxpayers in other parts of Japan. In such a system, voters will not be willing to check or control the administrative services being provided by their municipalities.

Policymakers have long championed decentralization of administrative power. But if they are really willing to do it, they should make a clear distinction between state-provided services and those offered by the local authorities and redistribute those revenues accordingly.

The decentralization law put into effect last month classified local governments' responsibilities into two categories -- their own administrative duties and those legally commissioned by the state. The distinction is a step forward in the sense that it clearly defines who is responsible for what.

Regrettably, however, the legislation failed to address the issue of revenue sources, thus leaving local governments hopelessly dependent on state coffers.

The cost of local administrative services should be borne by the recipients themselves, who in turn should be given a chance to determine whether those services are really necessary. To bring that about, disbursement of state revenue to local bodies should be minimized so the relationship between burden and benefit is clear.

Furthermore, each local government should be encouraged to offer tax, fiscal or regulatory incentives to lure businesses or build up tourism infrastructure. This is what is happening in the United States, where state governments woo corporate investments to beef up their economies.

To raise people's awareness as taxpayers, residential or property taxes on residential assets should serve as the main revenue sources for local governments.

The national government, in commissioning some of its jobs to municipalities, should pay for those costs not through lump-sum tax grants, but through commission fees.

The current system of tax grants to local governments, originally created right after the end of World War II, should be abolished. The times have changed, and it is the people themselves who pay for the cost of keeping an outdated system intact.

Yoshio Nakamura is managing director of the Japan Federation of Economic Organizations (Keidanren).

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The Japan Times

Article 3 of 3 in Business news


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