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Monday, Jan. 7, 2002

Think twice before 'penalizing' firms that adopt consolidated tax

Following tax reform proposals issued by the ruling coalition late last year, the government has decided to introduce the consolidated corporate taxation system in fiscal 2002.

But the Finance Ministry's Tax Bureau has also proposed -- and received the ruling parties' endorsement of -- a two percentage point surcharge on the corporate tax rate for companies that opt to use the system.

Consolidated taxation is an essential tool for private-sector firms as they pursue reorganization and streamlining, but the prospect of a surtax, which the government wants to offset the anticipated fall in tax revenue under the new system, would discourage many from using it. No other industrialized country has introduced a surtax to compensate for revenue declines.

A number of lawmakers in the ruling coalition who supported consolidated taxation have argued that the hollowing out of Japanese industries is a serious problem that must be stopped at all costs. This is a correct assessment of the situation, and unless something is done to change the trend, the Japanese economy will lose further vigor and more people will be slashed from the payroll. Then why did the same lawmakers approve the Finance Ministry's surtax scheme, which is tantamount to imposing a "penalty" on firms choosing the new system? After the introduction of consolidated taxation, tax revenue will fall by some 800 billion yen, the Finance Ministry says. But this estimate itself is questionable because it assumes that all Japanese companies would opt for consolidated taxation. The Finance Ministry is obviously too narrow-sighted, interested only in securing tax revenues over the short term.

So far, Japanese companies, especially those in the manufacturing sectors, have placed emphasis on securing jobs for their employees even during the protracted economic slump. If is often said that Japanese firms have accelerated their job-cutting efforts in recent years, but data show that the burden of personnel costs has risen substantially over the past decade.

While personnel costs accounted for 10 percent of sales at Japanese firms (14 percent in the manufacturing sectors) in 1990, the latest figure is 13 to 14 percent (16 percent in the manufacturing sectors). Such data clearly show that companies are struggling to maintain employment for workers while cutting other costs.

But if the government is to adopt policies that will further increase the burden on the corporate sector, many Japanese firms will have no choice but to move their operations abroad. If that happens, the damage to tax revenue will not be in the range of several hundred billions of yen. I wonder if the Finance Ministry takes such a long-range view of things.

Fortunately, the Council of Economic and Fiscal Policy, chaired by Prime Minister Junichiro Koizumi, is set to discuss fundamental reform of the tax system in February.

I want members of the council to consider the grand objective of reinvigorating the economy, rather than merely trying to secure tax revenues in the immediate future, and to reform the tax system as a key part of the economic infrastructure. And I hope the government would think twice about whether the surtax is a wise decision.

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

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The Japan Times

Article 2 of 2 in Business news


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