DPJ must ensure it can pay for its tax policy
The imminent birth of a government led by the Democratic Party of Japan will mark the start of great changes to the nation's taxation system--changes that will directly impact our daily lives.
In its manifesto for the Aug. 30 House of Representatives election, the DPJ said it would abolish income tax deductions for spouses and dependents, and drastically review special tax exemption measures currently in place, including some corporate tax breaks.
This amounts to a de facto tax increase by the DPJ, which is trying to secure a revenue stream to finance the party's much publicized child-allowance scheme.
Simply reading the party's manifesto does not give us a clear picture of how the burden of individual households and corporations will change.
The DPJ must immediately set about deciding which parts of the current tax system should be revised, so it can provide the public with concrete details of its new tax system.
All give and no take
The DPJ will need to rake in annual revenue of 5.3 trillion yen to enable it to distribute the 26,000 yen a month per child it promised to give households with children of middle school age or younger. For the first year, the DPJ will pay out only half the allowance. The party also has stated it will not abolish the tax deductions currently in place until fiscal 2011.
In pressing ahead with its plan to introduce the child rearing allowances before abolishing some tax deductions, the party presumably has an eye on meeting its campaign promises to make sure it can claim an achievement in the run-up to next year's House of Councillors election.
However, if the party avoids asking the public to accept an increased tax burden, painful to voters, and in doing so postpones the introduction of measures that are needed to secure revenue sources it will not be able to be judged as having met its election pledges.
The abolition of deductions should be discussed when drawing up tax revisions for next fiscal year, which come at the year's end, to ensure they are ready to be introduced.
The across-the-board child-rearing allowances has come in for some criticism, with some saying the system should be income-tested. If necessary, the party should not hesitate to change the amount, the period for which it is handed out and the method by which the allowances are distributed.
There are about 300 items covered by the special tax exemption measures, and that is regarding national taxes alone. The total value of the tax breaks comes to 7.3 trillion yen.
The tax breaks were effectively introduced as temporary measures, taken to achieve such things as the promotion of certain industries, but quite a few measures were then extended despite their original purposes being fulfilled.
Indeed, it is important to review such measures to ascertain their purposes and necessity. However, the termination of even opaque measures does not guarantee that new revenue sources will immediately be created.
A good sum of income from taxes could be generated if special measures that involve the granting of large tax cuts are terminated. However, suspension of such a large tax break also will have a sizable negative impact.
Some measures were introduced to aid the socially vulnerable, such as making interest on the savings of disabled people exempt from tax, and to spur economic growth, such as tax breaks for investment in facilities by mid- and small-sized companies.
It may be necessary for the new administration to make some of the special tax measures permanent if it determines they should be maintained. The DPJ should not forcibly cancel any tax break solely on the basis of prioritizing the securing of revenues over all other considerations.
New procedure for tax changes
The DPJ also plans to change the mechanism by which tax system revisions are made. Until now, the government's Tax Commission and the ruling Liberal Democratic Party's Research Commission on Tax System concurrently have been steering tax-related policies. The DPJ is to integrate the works under a new governmental tax panel to be created within the government. The new tax commission most likely will comprise only Diet members.
Since tax revisions will affect the interests of a wide array of people and companies, the DPJ must listen extensively to concerns and demands of as many of the concerned parties as possible.
If the new government already only has a few months left to study and decide on its tax system revisions for next fiscal year. As soon as prime minister-in-waiting Yukio Hatoyama launches his new cabinet, he must pull it into shape and ensure it gets straight to work on the matter.
(From The Yomiuri Shimbun, Sept. 7, 2009)