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Monday, Aug. 1, 2005

JAPANESE PERSPECTIVES

Tax Commission's plans show irrational thinking


In a report on income taxes for individuals released June 21, the Tax Commission called for a set of proposals to revamp the system. The proposals included: 1) ending tax breaks and further hiking taxes; 2) cutting deductions for salaried workers; and 3) reviewing a proposal to automatically deduct 380,000 yen from the taxable income of a worker with a low-income spouse.

However, these proposals have been strongly criticized by various layers of society.

True, a proposal for tax increases is always unpopular with the public, but I must point out that there were problems with the way the tax panel spelled out its latest proposals.

It goes without saying that steps must be taken to rebuild the depleted fiscal condition of the Japanese government. Of course, increases in tax revenue will become likely to a certain degree once the economy conquers deflation, but the hikes will still be far from sufficient.

Tax hikes achieved through tax system overhauls and cuts in government expenditures will be inevitable.

To win public support for these measures, the government needs to make it clear that it will raise taxes only if its greatest efforts to trim expenditures prove insufficient to fill the revenue shortage.

But the Tax Commission's latest report takes exactly the opposite position and calls only for tax increases.

The panel may think its job is only to consider tax issues and that government expenditures are matters outside its jurisdiction. But the public will not be convinced by such logic.

It is also hard to understand why the commission targeted the income tax.

In 2003, the same commission compiled a set of recommendations for Prime Minister Junichiro Koizumi, highlighting the importance of the consumption tax, "whose burden will be broadly shared among all generations" as a means of securing revenue in an era of declining birthrates and rapid aging.

But the commission's latest report contradicts the 2003 recommendations.

A closer look at each of the proposals for hiking the income tax reveals a number of problems.

For example, a major feature of the commission's report is reduced tax deductions for salaried workers. But the biggest problem in the tax system is that it fails to fully grasp the income of self-employed workers. Therefore, the priority should be on correctly assessing the income of self-employed workers by introducing a secure taxpayer numbering system.

Another problem is that a flaw in the structure of progressive tax rates, which end up putting a heavier burden on the middle and upper-middle classes, remains uncorrected.

If various income tax deductions are to be scaled back, the reductions should be combined with a reform in progressive taxation rates that gives them a flatter structure.

Income tax hikes serve as disincentives for the labor force and negatively affect the real economy. By analyzing the data on OECD member nations from the past 30 years, Keidanren quantitatively examined how tax systems affected economic growth in those countries.

We found that a consumption tax hike will result in temporary setbacks to growth, but that it will not have negative impacts on long-term growth. On the other hand, the study shows that increases in income and corporate taxes will serve as a long-lasting drag on an economy.

Given these considerations, the right path for the government to take would be to cut its expenditures to the maximum degree possible and then consider hikes mainly in the consumption tax.

Yoshio Nakamura is an acting director general of the Japan Business Federation (Nippon Keidanren).


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The Japan Times

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