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Top>Opinion>How to Proceed With Debate on Fundamental Tax System Reforms


Shigeki Morinobu

Shigeki Morinobu [Profile]

How to Proceed With Debate on Fundamental Tax System Reforms

Shigeki Morinobu
Professor of Tax Law, Chuo Law School, Chuo University

The Upper House election and debate over the consumption tax

The key issue of the Upper House election was the consumption tax. In order to mitigate the critical fiscal deficit and stabilize the social security system for the aging Japanese population, our tax burdens must be increased. While the ratio of tax and social security burdens in the national income is over 60 percent in Sweden and France and around 50 percent in Germany and the United Kingdom, it is less than 40 percent in Japan. Such a low burden would hardly be able to afford welfare services at the European level.

That is why the issue of a consumption tax hike suddenly emerged as a main issue in the election campaign. A tax increase, however, is not a simple proposition because a sound argument that wasteful expenditure must be eliminated first clearly prevails. Given the diverse values across society today, however, what is regarded as a wasteful expenditure for one person or region may often be seen as beneficial funds for another person or region. It is not easy to sort out what is wasteful and what is not. When I was involved in the second budget screening process led by the Democratic administration as a screener to check the expenditures of independent administrative agencies, I learned firsthand the difficulty of discerning what is wasteful and what is not. In any case, the social security cost would grow by 1 trillion yen or more per year due to the aging population if the social security systems were left untouched. This is a double-digit or triple-digit increase over revenue growth that could be generated by expenditure cuts.

Consequently, along with the elimination of wasteful expenditures, discussion should be raised about concrete measures to increase revenue, i.e. to raise the consumption tax. Accordingly, it was significant that this issue attracted great interest in the Upper House election and the media dealt largely with the necessity of tax reforms.

Tax reforms require balancing income, consumption, and assets

Tax system reforms are not only about the consumption tax hike. They also need to be conducted from the viewpoint of establishing a tax system that balances taxes on income, consumption, and assets (inheritance). These taxes have the following benefits, respectively.

The strength of the income tax is its vertical equity as it imposes a greater tax burden on people with more income. On the other hand, the increased burden from this progressive taxation scheme might impair incentive for labor or business. In addition, it is difficult to recognize income amounts correctly. In fact, the rate of income amounts successfully identified by tax authorities varies among types of business. Moreover, capital flight may result from economic globalization.

The consumption tax has horizontal equity—similar tax burdens on the same income amounts—and it constitutes a lighter burden on the economy because savings are not taxable. A shortcoming is its regressiveness—the ratio of tax on income is higher for people with lower income—which often becomes a political issue.

The asset tax enables us to correct asset disparity through redistribution of wealth and has smaller impacts on the flow in economic activities. It is, however, difficult to assess the value of properties and other assets.

Therefore, it is necessary to combine these taxes properly to build a balanced taxation system. Desirable tax reforms would include the following.

The issue of disparity and poverty should be addressed through the combination of the income tax and social security measures. Disparity can be divided into upward disparity—disparity due to an increase in rich entrepreneurs and professionals—and downward disparity—disparity caused by an increase in poor irregular employees. The latter has caused unprecedented problems of poverty in Japan. Solving them would require introducing tax deduction schemes with benefits, as employed in the U.S. and the U.K., which grant certain amounts of tax deductions to people who earn labor compensation over certain criteria, and offer benefits to offset any shortage of the deductions.

From the viewpoint of preventing disparity from becoming entrenched, expansion of the taxation base for the inheritance tax should also be considered. The inheritance tax in Japan focuses only on a small group of wealthy individuals, as it taxes only about 5 among 100 deaths. Its taxation base, therefore, should be enlarged to make the tax more effective.

The Japanese corporate tax rate is about 10 percent higher than those in other developed countries, leading to a drain of Japanese corporate income abroad. In order to solve this problem, the tax rate must be reduced and the taxation base needs to be expanded as well. Japan must be made more attractive as a business location in order to keep businesses in Japan and lure foreign companies that can generate tax revenue for maintaining the aging population.

Discuss tax reforms together with social security measures

Now, how can the fiscal problem mentioned at the beginning of this article be solved? Achieving robust public finance requires an increase in the consumption tax and other tax burdens. Expecting citizens to accept the tax hike without objection just to enhance public finance, however, would be overly optimistic. The following conditions would need to be met in order to persuade them to agree to heavier tax burdens.

Along with thorough review of the Democratic Party's manifesto, social security schemes, local tax allocation, and public servant systems, specific plans need to be presented as alternatives for building a new social security system which reassures the people by raising the consumption tax. I recommend that the government propose more than one social security plan (services) which citizens would be willing to purchase and new consumption tax rates (the price of these services) so that citizens can decide which to buy based on the tax rates or prices.

Tax system reforms are structural reforms through the increase and/or decrease of people's burdens. They necessarily entail benefits or losses to different people. In any case, however, we must take such a risk to achieve any reforms. It is the ability to persuade citizens to choke down this bitter pill that I expect of the Democratic administration.

Shigeki Morinobu
Professor of Tax Law, Chuo Law School, Chuo University
Professor Morinobu was born in 1950 in Hiroshima Prefecture. A Doctor of Jurisprudence (Tax Law), he joined the Ministry of Finance in 1973 after graduating from law school at Kyoto University. He served as chief of the Coordination Division at the Tax Bureau in 1998, as a professor in the School of Law at Osaka University in 1999, and as the director of Tokyo Customs in 2003. After teaching at Princeton University in 2004, he also served as president of the Policy Research Institute at the Ministry of Finance in 2005. He retired from the Ministry in 2006 and became a professor in Chuo Law School at Chuo University, the president for the Japan Tax Institute (, and a senior fellow at the Tokyo Foundation in 2007. He has also been a visiting professor on the Faculty of Law at the University of Tokyo, and a visiting scholar at Columbia Law School. Professor Morinobu's publications include Fundamental Tax System Reforms and the Consumption Tax [Bapponteki Zeisei Kaikaku to Shouhizei] (Okura Zaimu Kyokai); and Japan Will Be Reborn: Tax System Reforms [Nippon ga Umarekawaru: Zeisei Kaikaku] (Chuko Shinsho Laclef). He also edited and authored Tax Deduction with Benefits [Kyuufu-tsuki Zeigaku Koujo] (Chuokeizai-Sha).