The following is the provisional minutes of the Forum #7 prepared by Secretariat of ESRI Economic Policy Forum (for details see the whole record of the discussion in our Japanese HP).
| Date | May, 22, 2002, 14:00-17:00 | ||
| Panelists | Naosumi Atoda | Professor, Faculty of Business and Commerce, Keio University, Visiting Research Fellow, ESRI | (keynote speech) |
| Eiji Tajika | Professor, Graduate School of Economics,
Hitotsubashi University |
(keynote speech) | |
| Minoru Nakazato | Professor, Graduate School of Law and Politics,
University of Tokyo |
||
| Hiroaki Hayashi | Professor, Faculty of Economics, Kansai University | ||
| Moderator | Toshihiro Ihori | Executive Research Fellow, Economic and Social Research Institute, Cabinet Office,
Government of Japan |
|
| Language | Japanese only | ||
At the beginning of the discussion, Prof. Atoda and Prof. Tajika made the keynote speeches. Then panel discussion was held, including questions of general public and opinion exchange.
Present difficulties of Japanese economy and the distortions in tax system make tax reforms inevitable issues. The most important problem facing Japanese economy is deterioration of international competitiveness. We must pursue high-quality economic growth.
The Japanese now live in affluent. We need develop tax system capable to pursue diversified lifestyles.
Another point is the local economy. We need to change the centralized socio-economic system and establish self-supported local governments that can manage local economy by themselves.
Moreover, present social security schemes give people future uncertainties, which depresses private consumption. We need overhaul the schemes and show people certain future pictures of burdens and benefits.
We need to change the tax system not to give inefficiencies to economy. We have advocated "Neutrality" as one of the taxation principle, but it has caused inefficiencies of economy. I would like to employ "Efficiency" as the principle in stead of "Neutrality", but "Efficiency" is sometimes construed as favorable treatment of the rich. So I use the word "Vitality".
Corporate-related taxation schemes distort lifestyles. For example, withholding tax system and preferential taxation on retiring allowance force people company-oriented lifestyle. Allowance for spouse and special allowance for spouse distorts women' s work. As regards lowering the tax threshold, we need to realize it as the consequence of the efforts to correct distortions.
As for idea of the tax system reform, firstly I hold up "wide-scale reform since tax recommendations of the Shoup's Mission" in 1949, because the tax system has not been subjected to a major review for many years.
Secondly, I call for "Vitality" and recommend "wide and thin" taxation. "Wide" means expansion of taxation base and, thus, tax increase. "Thin" means tax cut. So "wide and thin" taxation clearly advocates combination of increase and reduction of tax. I added "simplicity" as the principle that is always necessary concept for tax system.
Thirdly, "increase competitiveness" is important, which relates to corporate-related taxes and finance-related taxes.
Fourthly, I declare not "Kohei" but "Kosei" that represents fairness' in English more properly, meaning that everybody who takes part in social life shares the burden. Although social security is necessary as a different policy, tax system should be fair in the sense that everybody pays taxes.
Finally, I set a goal of "small government". Traditional approach of balancing out only in tax revenues is not sufficient now. It is necessary to discuss tax system reform in combination with expenditure cut.
Regarding directions of tax reforms, first of all, we should aim to enhance vitality of enterprises and reduce related tax including tax rates. We should launch not temporary measures but full-scale measures regarding favourable treatment of research and development investment, and introduction of accelerated depreciation and others.
Second, in order to correspond to diversification of lifestyles, we should 1) avoid adverse effect on labour supply, 2) give more favourable treatment of gift tax to promote lifetime gifting, and 3) encourage donation so that private institutions may provide public service.
Finally, I would like to point out confusion in procedures of tax system reform. We are preoccupied with arguments on methodology and procedures at this crucial moment. After reorganization of government ministries in 2001, Cabinet office is supposed to compile basic policy, but how the opinion of ministries and agencies will be reflected remains unspecified. The discussion in the Council on Economic and Fiscal Policy is coordinated ex ante, but it is desirable to show process of decision making and changing to public.
Tax system reform cannot solve all of these problems, but it is important to think what can be done through tax system. The main point is not to ensure tax revenue, but to develop tax system capable to support structural reform and to create environment stimulating economic growth.
I have five issues. First of all, it is social insurance premium that is too heavy. From the early 1990s the tax burden has been reduced, but social insurance burden has become too heavy. Basic pension includes taxes as financial resource, but Ministry of Health, Labour and Welfare (MHLW) does not care about taxes. Old-age pension for active employees rebound on tax revenue through its impact on labour supply. MHLW does not care about this relation. On the other hand from the standpoint of tax burden, future social insurance burden is a big issue. If the proportional- to- remuneration part of public pension is reformed to private assets such as individual funded assets, total public burden on wages will decrease as a result.
Second, if we look at allotment of income tax, income tax is not progressive until the 9th decile group. It is because of big deductions from taxable income. Moreover, the fact that the average income of the 10th (highest) income group is only 12 million yen may suggest avoidance of tax.
Third, regarding the income tax reform, we should abolish allowance for spouse and special allowance for spouse and reduce allowance for public pension. Without income tax reforms, increase of budget deficit will prompt sharp rise of interest rate on government bonds. It is easier to obtain public understanding over reduction of these allowances than increase in consumption tax.
Nowadays, special treatment for full-time housewives is not necessary. Instead, we had better provide child support and other assistance. Not only social security program but also tax scheme can provide child support.
As regards allowance for public pension, there is a problem of considerable burden gap between a recipient of a pension and an employee having the same level of income. The reform may be painful, but it is necessary to accept it because reduction of the allowance will contribute budgetary resources for social security.
Among the decreased receipts of income tax due to allowances, allowance for spouse, public pension, employment income, and social insurance premium account for 1.2 trillion yen, 1 trillion yen, 7 trillion yen and 2 trillion respectively. Among these allowances, reform of employment income deduction need be carried together with strengthening taxation of self-employed workers. The reform of social insurance system will be necessary for reform of deduction for social insurance premium.
Forth, Japanese corporate tax, especially local corporate tax are high. Globalization of economic activity increasingly makes it difficult to secure much tax revenue from corporate tax. Japan also has a problem of high domestic costs. Investment tax credit is necessary, but more argument is necessary for tax rate per se. Local corporate taxes are obviously high. Ministry of Public Management, Home Affairs, Posts and Telecommunications consolidates management of local corporate taxes preventing competition in tax reduction among local governments. It is necessary to abolish corporate business tax. Prefectural governments supply such services as school and police from their tax revenue, 30-40% of which come from corporate business tax. It is necessary to ask the nation whether the current structure of this tax revenue is appropriate or not.
Finally, recently there is a dispute of dual income tax (imposition of taxes on earned income and capital income separately). I do not think it is a bad choice, but it is not a goal of income tax reform. The dual income tax was adopted in Norway and Sweden in the 1970-80s due to rising inequality in capital income tax. The adoption of dual income tax in Japan is not bad because it will create investment-stimulating environment. Dual income tax is not a goal, because capital will easily move internationally in the future. But I think it a realistic method at present.
I would like to discuss this problem from the viewpoint of law, not economics.
I understood the dispute of keynote speakers, but the expectations toward taxation are all too big. It sounds like reorganization of the tax system will change the world as if by magic, but it is impossible in the reality.
While disputing about taxation system, we cannot ignore the role of law. Even economically desirable taxation cannot be put into practice if it violates the law. Law and legal system cannot be ignored. Even when the law is changed, it will take time for the new system to percolate through the whole society due to inertia.
The "simple" tax system is a contradictory word. The system accessible to laymen is close to a dream. Complexity is not bad. That is what professionals are for. The tax system without concrete and detailed description (the system not including legal aspect) is no more than nil. In the United States Joint Committee on Tax consisting of approximately 50 specialists examines the tax system. It consists of 20-30 economists and 20-30 legal specialists.
It is empirically proved that the tax burden in Japan is light. Even adding social insurance, the burden is the lowest level among OECD countries. Tax reductions have already been reduced, so further reduction is not necessary.
The main reason for Japanese economic slowdown is deterioration in the quality of human capital. While working population is decreasing due to aging, consuming population is increasing. I am sceptical that tax system reform can vitalize the economy under such circumstances.
(Prof. Hiroaki Hayashi, Faculty of Economics, Kansai University)
I do not quite understand whether it is a structural reform of tax system or tax system necessary for structural reform. I would like to tell my opinion about 1) revitalization, 2) income taxes and 3) local taxes.
The first point is revitalization. We often hear "structural reform" in many different situations, but when we talk about economic growth such as "There can be no growth without structural reform", it means to reform economic structure or industrial structure so as to meet international competition. As the population decreases in the future, it is indispensable to improve per-capita productivity to maintain the level of GDP. With this task in mind, corporate tax reduction need not be done across-the-board. Tax reduction can be done by narrowing the focus on specific industries although it deviates from the neutrality principle of tax system. Public works budget can be channelled for the tax reduction. This will reinforce the revitalization effects. Just after the World War II, Japan took the priority production system to restore the economy. If we see the current situation is the same with that after the World War II, we should examine possibility of favourable treatment of priority industries. The Council on Economic and Fiscal Policy can show what industries should be chosen.
Second is the problem of income tax. The two disputes of revitalization and encouragement of consumption are intermingled. There was also a dispute of "wide and thin" during the previous tax system reform on the grounds that wage difference between executives and lowly employees narrowed and there was no need for progressive taxation. This time we cannot accept the idea of "wide and thin" because realization of a society in which effort is rewarded means widening income disparity. The income tax should have a certain level of income redistribution effect.
With regard to local taxes, some disputes a lot about transfer of tax sources, but I think the first thing we should argue is the reform of local tax as it ought to be. We should create local tax system not for central government, but for residents. The ratio of local and central tax sources is 4 to 6. It does not differ a lot from other countries.
(Moderator)
Prof. Tajika, what do you think about quantitative effect of tax reform?
(Tajika)
The corporate tax cut will change the cost of capital and hence will affect interest rate, so it is difficult to compute the effect of 1% cut on GDP. Corporate tax causes distortions in decision of internal and borrowed funds, inventory investment and capital investment and others. What is necessary is to reform the tax system in such a way that companies decide to base headquarters at Japan.
(Atoda)
The present tax system gives disincentive to women's work. This problem needs thorough examination.
I think the tax rate cut in income tax will not affect labour supply but may be good to prevent tax avoidance.
"Wide and thin" burden sharing is one of the purposes of the current tax system reform. But it does not intend to flatten income tax rates table. I do not think it is necessary to lower maximum tax rate. Setting the minimum tax rate at 5%, it is enough to lessen the burden of those whose taxes increased.
(Tajika)
Regarding disincentive to women's work, I agree with Prof. Atoda.
Since the elasticity of labour supply to tax is low, tax avoidance is unlikely to change. Small-and medium-sized companies also make use of exemption for employment income. High marginal tax rate is appealing as a psychological theory, but it does not prove to be effective. We lose nothing if lower maximum tax rate. We would rather focus on how to reduce tax avoidance.
(Moderator)
Prof. Nakazato, have you changed your opinion on revitalization after hearing the dispute of the two panellists?
(Nakazato)
For revitalization of economy it is necessary to lower wages that are too high in Japan.
Concerning the problem of income tax, there are a lot of ways to avoid maximum tax rate. Even if the maximum tax rate is lowered, person who avoided taxes will continue to avoid. The cut in income tax will hardly affect labour supply.
There are many technical problems in Japanese tax system. Loan-loss reserves are difficult to enter under losses. Japan is the only country who does not admit full cost recovery in the calculation of residual value of depreciation allowance. Admitted depreciation is too slow. These problems are directly connected with business. Reform is important in such areas.
(Moderator)
What do you think about dual income tax system?
(Atoda)
Introduction of dual income tax is the only point that the Council on Economic and Fiscal Policy and the Tax Commission can agree although the meaning and methods of both sides are different.
(Hayashi)
We should set out dual income tax as a second best choice.
(Tajika)
I said that dual income tax system was not a goal. But the goal may not come forever. In the background of dispute about dual income tax, there was a discussion of separate declaration of tax on transfer gain of stocks and a discussion of encouraging risky assets holding of households.
The adoption of dual income tax would not solve the problem of capital income treatment. There are a lot of suggestions concerning the treatment of capital income, namely: 1) introduce an expenditure tax and not impose capital income tax, 2) impose tax on outstanding balance as the proxy of capital gain, and 3) not admit deduction of interest payment and not impose tax on capital income at the individual stage.
(Nakazato)
I can understand the dual income tax from the standpoint of microeconomics. However, a sudden discussion of Norway and Sweden seems out of the ordinary to me.
(Tajika)
In the 1970-80s in Northern Europe a significant deduction of interest payments due to inflation accelerated moves toward reduction of saving and purchase of consumer durable goods. Arguments that capital income tax increase disparity triggered the dispute of dual income tax. In this sense I do not think it is a strange discussion.
(Nakazato)
Maybe, this dispute is not strange in Western Europe, but here it is rather unexpected. Dual income tax is nothing more than a discussion whether to classify income into two groups or more when filling in the declaration. Aggregation of profit and loss within asset income or unification of tax rates is possible even without dual income tax framework.
(Audience)
I have run a business in the United States for a long time. I do not think the Japanese taxes are high compared with the United States. In the United States the real burden of taxes is heavy because companies must pay contributions to Retiree Health Care and contributions required by 401k article to Pension Fund of employees. I think there is no need to reduce taxes in Japan to enhance competitiveness. Although law prohibits the discrimination on the basis of age or sex, companies do not follow it properly. I object to cut in the corporate tax. I think it is necessary to bear not only the primary burden, but also the burden of other costs.
(Tajika)
The tax system in the United States is heavily dependent upon the direct taxes imposed on individuals and corporations. This raises the problem of tax avoidance. The costs including electricity expenditures and others are higher in Japan as compared to other Asian countries. Under such circumstances, to secure international competitiveness it is necessary to improve the economic environment by overhaul of tax system.
(Atoda)
The Japanese taxes and charges with the inclusion of social security burden are slightly lower compared with the state California having the heaviest taxes in the United States. But they are slightly higher compared with average state. They are high compared with the United Kingdom where no local taxes are levied. They are high compared with Sweden. Therefore, I understand that Japanese tax burden is heavy.
Although the economic impact of corporate tax cut is small, tax cut is better than doing nothing. Under the current severe circumstances, we cannot afford just sitting and waiting. The cut in corporate rate will signal the intention to enhance vitality and push economy back on the growth path.
(Audience)
As for the deflationary gap, I think 70 trillion yen is an exaggeration. I think it is about 30-35 trillion yen.
It looks strange that 40% of budget expenditures are postponed until future generations in peace time.
I understand Prof. Nakazato, but do you mean that economists do not understand law? The procedure and accounting are extremely important and some economists do consider legislation.
(Nakazato)
You are right. I think that Prof. Atoda explained the fairness in rather legal sense.
(Atoda)
I think if one uses official unemployment rate of 5.2% the deflationary gap is as calculated by Prof. Hamada. However, I think the deflationary gap is more than 70 trillion yen if we consider concealed unemployment.
(Audience)
Basically, high estimation of potential growth leads to high estimation of deflationary gap such as 70 trillion and more. The main problem is that both the rate of labour productivity growth and profitability rate of business enterprises is nearly zero. I suppose that deflationary gap is about 4-5% of GDP or 20-25 trillion yen.
To understand whether the corporate tax in Japan is high or low, it is necessary to compare it to other countries. I think it is high when local taxes are included. If we allow cutting corporate taxes, we need cut individual taxes as well to avoid distortions. Tax system basically causes distortions, unless the tax is charged in a lump sum. The main point is how much the distortion can be reduced. Regarding 'neutrality, there is that for capital export, that for capital import and that for social welfare maximization. Choice of neutrality is another problem. I think the message of the Council on Economic and Fiscal Policy is acceptance of vitality.
Given lowering the tax exemption limit on incomes, it is possible to extricate from poverty trap by introducing negative income tax.
(Audience)
I understand the levying income tax widely and thinly, but I do not understand why inheritance tax should be levied widely and thinly. Certainly, only 1 of 20 persons pays inheritance tax in Japan. But in the United States only one of 50 pays. The inheritance tax is not paid in Canada and Australia. In case of income tax it is easier to pay because there is a cash flow. But inheritance does not accompany cash flow, which cause a problem for inheritance tax. If we assume income redistribution role, the concept of 'wide and thin' should not be applied to the inheritance tax.
(Atoda)
Inheritance tax can be argued in many different ways. In case of Japan, when the wealth is inherited not by spouse but by children, It can be eventually the same with transfer of money or assets. Inheritance tax can be sort of income tax in the future, but now it is impossible. The present tax reform intends to encourage lifetime gifting when young. The accumulated tax amount is adjusted at the stage of inheritance. Leaving redistribution factor to some extent, I think, we should gradually get down to the future target.
(Tajika)
I deliberately did not talk about inheritance tax at the keynote speech. The motive of bequest is rooted in the future uncertainty. It does not matter if we move inheritance to lifetime gifting. However, I think there is no need to take up it as a policy target in the present tax system reform.
(Nakazato)
I do not want to comment on the problems involving morality such as income redistribution. I would like to point out that inheritance tax has aspects that consequently aimed at some of urban citizens.
(Hayashi)
The increase in the inheritance tax may have two opposite effects, namely stimulating consumption by making early consumption more attractive and indisposing for work. Although I may be conservative, I think taxes should be levied widely and thinly in equalized society. And if social inequality proceeds, we should aim at redistribution. I think inheritance tax should have redistribution effect.
(Audience)
I am freelance writer. I cannot agree with the opinion of Prof. Atoda that low-income earners are not the weak. Don't you consider unstable employee such as part-time workers or uncertain income earner like me as the weak?
(Atoda)
It is quite difficult to give a definition of the "weak". Certainly, there is a problem of lack of employment opportunities, but a person capable to work should not be considered as a weak. Only those who are disable to work should be treated as weak. I think it is necessary to make some income fluctuation insurance. Nevertheless, taxes as costs of social participation are to be paid.
(Audience)
The discussion of the dual income tax is not a sudden one. It was taken up in the dispute of Tax Commission in 1998. The dispute has started in OECD some years ago. In order to solve the problem of tax imposition on capital and financial assets, the dispute is now gradually permeating from Northern countries. The United States want to adopt the dual income tax as well if it could change the tax system from the very beginning. In Japan the adoption is relatively easy because Japan has separate capital tax.
(Nakazato)
Both human capital and physical capital increase the value in the future. Main difficulty in inheritance tax lays in different treatment of these capitals; namely, human capital (visage or intellectual power) is non-taxable, while physical capital (financial assets or real estate) is taxable. Regarding dual income tax, the biggest problem is rather how to eliminate artificial loss in case of financial income. The content is more important than the sign "dual".
(Audience)
The cultural facilities and other public constructions made by the private sector were frequently seen in Japan's Meiji era and can be found in the present United States. Is it possible under the current tax system? What do you think about the idea of encouraging donation rather than bequest to transform state-centered culture to individual-centered culture?
Regarding "simplicity", tax accountants in company complain about the complexity. I think what is necessary is to reduce examinations items of tax accounting, not to cut taxes.
(Atoda)
I did not argue detailed treatments of donation and NGO. But, I think a society where donations are made to support private supply of public services is desirable, which is in compliance with diversification of lifestyles. I consider the inheritance tax from the standpoint that donation is preferred to inheritance by incapable children.
Regarding "simplicity", tax system must be comprehensible to junior high school students, since legal obligation to pay taxes should be clearly understood by them.
(Nakazato)
I think it is impossible to make a tax system accessible to laymen. There is a possibility that such a system will oversimplify different points and lack concrete legitimacy to considerable extent. If you use simplicity in the sense of predictability, it is possible to enhance predictability even under the complex tax system. The Japanese tax system is simple as compared to the system of the United States, United Kingdom, Germany, France and other countries. In United Kingdom, there is a business performing a search of articles concerning taxes. Complex tax system is evidence of civilized nation pursuing legitimacy. Legal actions against it are also an evidence of civilized nation. If the company cannot do business due to tax system factors, it means that professional competence of this company is low. It is enough to employ specialists having creativity.
(Tajika)
The simplicity we discussed here means that we can make form and style easy to make a declaration. It is different from the simplicity meant by Prof. Nakazato. The simplicity that should be placed on agenda in the current tax system reform is the simplicity in the sense of capability to filling income tax report oneself.
(Audience)
I am a student of Keio University. I would like to ask a question to Prof. Nakazato. You are skeptical that one should expect too much from tax system reform. What is your personal opinion on the desirable tax system?
(Nakazato)
I consider reasonable all the points discussed by Prof. Tajika. Nevertheless, if we start from the blank sheet, any dispute will be possible, but now when discussing how to reform a system we have to take into consideration feasibility, possibility and spillover effect on the assumption of current situation. It is difficult to implement ideal system. There is no sense of talking about my vision of the ideal system. I think we should first eliminate the unpleasant point in front of our eyes. Even in case of success, we should not seek for the ideal system. We should solve another unpleasant problem by priority.
Speaking about my ideal system, as I am a supporter of consumption tax, I would recommend value-added tax about 50% and abolish other taxes.
(Atoda)
We do not dispute about tax system reform conservatively. We are considering tax system reform conducive to structural reform. In this sense it is necessary to include comprehensive design as well.