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21st Century Shape of Japan Series, No. 4
TAX REFORM IS AN ABSOLUTE CONDITION FOR
INDSTRIAL STRUCTURE REFORM AND THE PROMOTION OF KOWLEDGE-BUILDING
CAPACITY
Reform Laws to Put Individuals on Equal Footing with Companies
and Employers
| Q |
Tax reform aimed at extricating Japan from this recession
has become an issue. Why must we pay taxes in the first place? |
| A |
Citizens pay the State without consideration in two cases:
(1) when a fine is imposed for having committed a wrong, and
(2) when paying taxes. As for the former, payment is made as
compensation for causing trouble to the State. This seems persuasive.
The latter, however, requires some explanation. A person who
earns revenue by working diligently and conscientiously night
and day like Ninomiya Kinjiro (a familiar character of old who
is perhaps not well known today's young people) has a tax imposed
on his income (revenue - expenses = income) by reason of his
having earned it. On the other hand, a lazy person who has no
revenue (income) is not taxed. To put it bluntly, the more diligent
one is, the more one is taxed; however, a person who does not
work not only pays no tax but, depending on the case, may be
provided money by the State. This sort of seemingly illogical
result is a feature of the tax problem.
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| Q |
That's right. For ordinary folks who know nothing about taxation
or the Tax Law, the result is not understandable. |
| A |
The foundation for taxation in the modern state is the assumption
of a capitalist economic society. In order to smoothly develop
and expand the capitalist market economy, the nation performs
a minimal role, and the citizens bear the expenses (annual expenditures)
necessary for this (financial democracy) (*1).
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| Q |
The ruling party has recently been announcing in the press
that measures to jump start the stock market are being considered
as emergency economic measures. For example, there was the announcement
about allowing the balance of individual's stock transfer losses
to be carried forward to the next year. What is that about? |
| A |
The government is weighing the conversion of enterprise fund
procurement from the indirect financing of bank loans, etc.
to direct financing through stock investment by individual.
In Japan, the ratio of Japanese individual investors decreases
year by year, while foreign shareholders (foreign investment
companies) is rapidly increasing.
Presently, Japanese must pay income tax of 26% on profits earned
from the sale of stocks. On the other hand, when a loss on sale
occurs, the entirety of that loss must be individually paid
within that year. It is prohibited to offset the loss against
other profit by totaling it up with one's other income, such
as salary, business income, real estate income and so on. Further,
it is prohibited to offset the loss by carrying the loss forward
after the following year and totaling it up with the various
income of the following years.
The government is talking about allowing these steps. In a case
where a company invests in stock and suffers a loss on sale
or evaluation loss, it is of course allowed to total up the
loss with income other than stock investments and carry it forward
to the following year.
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| Q |
Why is the treatment of companies different from that of
individuals? |
| A |
In their relationship to the nation, the taxes of companies
and the taxes of individuals are equal. Both companies and individuals
pay the government taxes on their incomes. In Japan, corporate
tax and income tax are separate, but in countries such as the
United States they are both called income tax. In the 21st century,
the creations of individual brains and intellectual activities
are important assets in a nation's wealth. In eras of high growth
up to now, enterprises were the focal points of wealth, but
from now on we need to make policies that make use the increase
of citizens' individual assets and energy. And that is why revising
the current tax law, which disfavors individuals, and putting
individuals on at least the same footing as enterprises is the
aim of proposal.
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| Q |
How are things handled in foreign countries? |
| A |
All of the developed nations such as United States, the United
Kingdom, Germany and France allow losses on the sale of stocks
to be carried forward into the next year and until the loss
decreases to zero. In addition, the totaling up of losses and
profits has some restrictions but is allowed in all of these
countries. From the viewpoint of the individual shareholder,
the Japanese tax law, under which one pays tax in that year
if one profits and if one loses money, the entirety of that
loss must be individually paid within that year, amounts to
a policy statement that "stock transactions are evil in nature."
This is a tax law that contemplates stock transactions in a
sense as like gambling; i.e., as an activity which citizens
engaged in honest work should not partake of. On the surface,
we are told, "High risk, high return," but this is a tax law
of "High risk, low return."
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| Q |
Another item being considered as an emergency economic measure
is the inheritance tax issue. Is it true that Japan's inheritance
tax is the highest in the world? |
| A |
That is true. Japan's inheritance tax can impose a taxation
rate of as much as 70% on the entire amount of property that
a legal heir acquires through inheritance. As for foreign countries,
New Zealand, Australia and Canada have abolished the inheritance
tax, and in the U.S., President Bush has submitted to the Congress
a tax reduction bill that would abolish the inheritance tax
gradually over eight years. Japan's Finance Ministry says that
because the 70% rate is only applied to 5% of the citizens who
pay inheritance tax, the rate has little impact. However, it
is the equation of a market economy that high-bracket taxpayers
and those who pay a lot in inheritance tax are the successful
and the elites who form the basis of the capitalist system,
which is the root of the nation. Taxing the top 5% of these
contributors and elites at the 70% rate amounts to treating
them not as the successful but as criminals who are being fined.
As Prime Minister Margaret Thatcher once said, "Even if you
treat the rich coldly and make them poor, the poor are not going
to become rich" (that is, in a nation of intelligent, cultivated
citizenry, a welfare policy of income redistribution produces
more evil than good). The bureaucrats of the Finance Ministry
are elites of a high percentile that accounts for the top 0.001%
of the citizens of the same age. Taxing the top 5% of income
earners is the same as deducting 70% of the results as bureaucrats
of these elites because they comprise no more than 0.001% of
the population. That would not be persuasive at all. Professor
Shoichi Watabe of Sophia University has for some time advocated
both a flat ten percent income tax and the complete abolition
of the inheritance tax, stating that "egalitarianism is the
road to Hell," and I am in agreement with him.
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| Q |
The Ministry of Health, Labor & Welfare is providing up to
300,000 yen per person in educational and training benefits
in order to develop the human resources of workers. What do
you think of this as an economic stimulus measure? |
| A |
The government began giving out educational and training benefits
in March of 1999. As of February 2001, the number of people
who received the benefits totaled 401,000 and the total amount
of benefits was 38.5 billion yen. Compared to public investment
in bridges, roads, dams, etc., 38.5 billion yen over a period
of two years is very little. However, the recipients number
over 400,000, and this has a considerable impact on future economic
measures that are expected to yield renewed national strength
from the development of workers' human resources. In this way,
a small public investment in human abilities can be expected
to produce unlimited possibilities. The true
value of the saying that "the value of education is realized
by a country over a hundred years" is all the more clearly shown
in a knowledge-creating society. By the way, if a company or
individual employer pays vocational training expenses or purchases
physical facilities in order to develop the human resources
of employees (or oneself), the entire cost and depreciation
for these are allowed under the Tax Law. In contrast, if a worker
incurs the same expenses to develop his or her own human resources,
these costs are not allowed as necessary expenses. The Finance
Ministry denies this on the basis of wage income deduction being
uniformly allowed (*2). Going forward, however,
the government is setting policy towards the startup of new
businesses with hopes placed on the venture spirit of salarymen
and creative abilities. To that end, expenses should be allowed
to individuals on at least the same footing as companies and
employers. At the present time, Japan is carrying forward Diet
reform, Cabinet reform, administrative reform and judicial reform.
From the standpoint of the essence of civilization, these are
steps toward a knowledge-creating society. They are preparations
for the arrival of a knowledge-valuing society that whose infrastructure
will be intellectual property rights and information technology.
Just as it was once said in the Roman Empire that "All roads
lead to Rome," it is appropriate to say that under the capitalist
market economy, "All roads lead to the taxation system."
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(Author: The form of question and answer was taken to clarify the
issues.)
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