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Monday, Dec. 8, 2003

JAPANESE PERSPECTIVES

Think carefully before embarking on tax and pension system reforms


With the House of Representatives election over and the roster for the policy panel of the ruling coalition set, discussions on tax reform for the next fiscal year have finally gotten under way -- half a month later than average. I would like to mention some points we would like to emphasize on this issue.

In recent years, the corporate tax system has been changed in ways that have improved the competitiveness of Japanese firms -- the effective corporate tax rate is lower, consolidated taxation was introduced, tax breaks are encouraging large research and development projects, and tax cuts are being granted to promote information and technology investment. As a result, the total tax burden on Japanese corporations, which stood at roughly 60 percent in 1995, has dropped below 50 percent.

The biggest factor was the effective corporate tax rate, which sank from 49.98 percent to 40.87 percent.

On the other hand, Japanese corporations still shoulder a large public burden that includes land-related taxation and social security costs. In particular, the per-employee cost for social security has risen by roughly 25 percent since 1995. This has had a serious impact on companies' ability to maintain jobs and remain internationally competitive.

What we now need is a comprehensive revamping of the tax, fiscal and social security systems in light of the public pension reform scheduled for next year.

According to Keidanren research, it is clear that a rise in pension premiums will result in corporations reducing the number of employees, whose premiums they partly pay.

Pension system reform has the potential to affect future tax and fiscal reforms. The government shouldn't resort to raising pension premiums for corporations and individuals without making other fundamental changes first -- such as lowering the size of the payouts. It should also strictly adhere to the principle of taxing pensions -- not at the contribution and investment stages, but upon reception -- to do away with special corporate taxes and reduce tax deductions on public pensions.

Since the collapse of the bubble economy, Japan has twice been on the verge of recovery. But each time, the upturns lost steam due to increased taxation and social security burdens. The nation should not make the same mistake again.

As it considers tax reform for fiscal 2004, the government should ensure these budding signs of economic upturn turn into a full-scale recovery. One thing it must do is extend or expand tax breaks for housing loans, which boost demand and have a far-reaching impact on the economy.

The government should also consider other tax measures for revitalizing business activity, such as lowering the fixed asset tax -- which is imposed on corporations irrespective of earnings -- and review its plans for introducing a pro forma local business tax.

The Environment Ministry has proposed creating a carbon tax as a step to curb emissions of greenhouse gases. But the government should be cautious about levying an environmental tax without reviewing existing energy taxes and examining how effective nontax measures have been against global warming.

Yoshio Nakamura is a senior managing director of Nippon Keidanren.


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