Action 31. Overhaul the Tax System. Strengthen the Country’s Fiscal Foundation through Revenue Reform

In 1990, just before the collapse of the bubble economy, Japan’s tax revenue was 60.1 trillion yen, but by 2009 it had slumped to 38.4 trillion yen. In Japan there’s an expression: “tax is the nation.” What it means is that the behavior of people and companies is heavily influenced by the tax system. In the globalized world of today, an urgent task is to transform Japan’s tax system with reference to international standards in order to ensure that economic growth benefits the national coffers.

1. Combine Corporate Taxes into a Single National Tax and Reduce the Effective Rate to 25%

The corporate tax rate in Japan was reduced in 2012 and 2015, bringing the effective tax rate, which includes local taxes, down to 31.3%. But the gap with the rest of Asia remains large. For example, in China the rate is 25%, in South Korea it is around 24%, and in Singapore it is 17%. As a way to compete internationally on tax in a globalized world, we hope that corporate taxes will be combined into a single national tax in order to allow the rate to be adjusted flexibly, and that the effective corporate tax rate be cut to 25%.

2. Reform Income Taxes to Motivate People to Work. Promote the Transfer of Assets to the Working Generation through Inheritance and Gift Taxes

In Japan, the highest rate of income tax, including local residence tax, has now reached 55%. Singapore has also steadily hiked its top tax rate, but in 2015, when it reached its highest level ever, it was still 22%. Japan also needs to keep its top rate of income tax as low as possible. A scalpel also needs to be taken to Japan’s tax structure, which is unusual among advanced nations in that the vast majority of people enjoy extremely low rates of income tax. We also want the spousal deduction, which serves as a disincentive to work for women, to be scrapped completely, in order to unleash Japan’s biggest potential labor force, i.e. women.

In Japan, inheritance tax and gift tax account for a mere 1.8% of total tax revenue. Inheritance tax is paid on just 4% of estates (providing revenue of around 1.5 trillion yen). This is a legacy of factors such as the expansion in tax breaks that occurred as land prices soared during the bubble era. To make the tax system fairer, the taxation base needs to be broadened to spread the tax burden more widely. In addition, the tax system needs to be redesigned to encourage the transfer of assets to the current working generation and contribute to stimulating consumption and economic growth.

3. Steadily Raise Consumption Tax to 10%. Avoid Reduced Tax Rates to the Greatest Extent Possible

Japan’s consumption tax rate is extremely low compared with other countries. The government must therefore raise it to 10% in April 2017. Reduced tax rates, which are being promoted as a way of easing the burden on low-income earners, are beset with numerous problems. For example, it would cost around 600 billion yen in tax revenues for each 1% reduction in the rate of tax on food. In addition, the selection of goods and services eligible for reduced tax rates could lead to cozy ties between companies and politicians and become a hotbed for pressure on the government. Such a situation absolutely must be avoided.

4. Make the Tax System Simple and Fair

Annual changes to the tax system often include special measures relating to corporate tax that are aimed at stimulating the economy. These include measures to promote investment in plant and equipment, R&D, employment, and so on. But measures such as lower taxes on capital expenditure overly favor the manufacturing sector, while other tax breaks, which are complex in nature, have little impact. A permanent reduction in the corporate tax rate would be more effective as it would lead to higher levels of investment, income, and employment. A simple and fair tax system is needed. Specifically, we require:

1. A tax system that encourages competition and contributes to economic growth à lower corporate tax rate

2. A tax system that rewards hard-working people à reduction in the highest rate of income tax

3. Spreading the tax burden fairly among as many people as possible à expansion in the taxation base, a higher consumption tax rate, and the abolition of various deductions