EDITORIAL: Clock is ticking on tax reform to finance the future
The tax debate among government and ruling party policymakers involved in the development of a draft plan for integrated tax and social security reform is coming to a head. This is an important process to secure financing of the social security reform plan recently drawn up by the government.
The government and the ruling Democratic Party of Japan decided in June to gradually raise the consumption tax rate to 10 percent by the mid-2010s as part of the integrated reform. The first thing is to decide on specifics of the proposed consumption tax hike--the timing and scale of each of the tax increases.
The ruling camp has made it clear that all the revenue from the consumption tax will be used to finance growing social security spending. This policy is based on the notion that the consumption tax, which everyone pays at the point of purchase, is suitable as a revenue source to fund the social security system, the principal social safety net based on mutual aid among all members of society.
But raising the consumption tax rate to 10 percent alone will not put social security on a firm and sustainable financial footing.
The government’s social security spending, including health care, pension, nursing care and child care benefits, will reach 108 trillion yen ($1.383 trillion) in fiscal 2011, which runs through March 2012.
Of that total, nearly 60 trillion yen is financed by social security premiums collected from taxpayers. The revenue from a 10-percent consumption tax is less than 30 trillion yen, while social security spending keeps growing by 3 trillion yen every year. The consumption tax hike now being discussed will only be one landmark in the long process of making the social security system financially sustainable.
That is why it is vital to start a serious and in-depth debate on taxes other than the consumption tax from the viewpoint of the future of the nation’s tax system.
The government has already decided to lower the effective corporate tax rate in response to intensifying international competition companies are facing. So the debate on the future of the tax system should focus on such key levies as income and inheritance taxes.
One proposal would change the current six income tax brackets--ranging from 5 to 40 percent--and raise the top tax rate to 45 percent.
The government is also considering shrinking various tax deductions, which reduce the amount of income subject to tax.
The draft bill for tax changes for the next fiscal year already includes a provision to impose a ceiling on the standard income deduction applied to corporate employees. This provision was first proposed as part of the tax changes for the current fiscal year but later dropped amid partisan confrontation at the Diet.
The state general-account budget is in dire straits, with the amount of government bond issues, or the government’s overall borrowing, exceeding the total tax revenue.
It is now inevitable that the tax burden on high-income earners will be increased in addition to raising the consumption tax.
But effective efforts should be made to avoid putting an excessive load on the working population, or people who bear the burden of swelling social security spending in an aging society.
It is also necessary to debate the question of what would be the best balance between premium payments for health-care, pension and nursing care programs and income tax payments.
In planning an increase in the social security burden, the emphasis should be placed on taxation of assets.
Another proposal for fiscal 2011 tax changes that fell through would have reduced the basic deduction for the inheritance tax and lifted the top rate to 55 percent from 50 percent. This is a good place to start.
With economic inequality widening in this nation, it would make sense, also from the viewpoint of fairness, to increase the tax burden on people who have a significant amount of assets coming, for example, from a large inheritance from their parents.
The government and the ruling party first need to draw up a vision for the overall tax reform focused on the consumption tax. Then, they need to develop a specific plan and timetable for pushing through the reform.