The Ministry of Finance (MOF) released the nation's General Accounts Summary for fiscal 2002 on 4 July. Whilst estimates of national tax revenues were lowered in the latter part of November 2002, they were 452.8 billion yen below estimates, forming the second consecutive year of shortfalls in revenue. Whilst the MOF had been forecasting tax revenues of 46.816 trillion yen, actual tax revenues were 43.8231 trillion, a difference of 2.9929 trillion. The primary cause was a reduction of 466.5 billion yen in corporations tax revenues, which remained at 9.523 trillion yen. Corporations tax slipped lower than consumption tax, leading the MOF to forecast tax revenues for the fiscal 2003 budget at 41.8 trillion yen, the lowest level in the 16 years since 1987.

The calculations of Japan's GDP are summarized in a vast number of statistical tables in accordance with the statistical methods publicized by the Cabinet Office's Economic and Social Research Institute.*1 Fiscal 2002 GDP was nominally 499 trillion yen (down 0.7% compared to the nominal GDP for the previous period) and 540.6 trillion in real terms (an increase of 1.5% against real GDP for the previous period).

Whilst the nominal growth rate for GDP has declined slightly, there is no explanation for the two consecutive years of drastic shortfalls in national revenues. I have drawn the following conclusions in an attempt to explain the reasons for the revenue reduction.

In the first place, Articles 2 and 4 of the Corporations Tax Law exempt a massive number of juridical persons from corporations tax (except for profit-making businesses). The number comprises around 26,000 juridical persons ("public-service corporations") covered by Article 34 of the Civil Code, 7,400 incorporated educational institutions, 17,500 incorporated social welfare institutions, 183,000 incorporated religious institutions and 10,000 incorporated NPOs, making a total of 244,000 incorporated bodies.*2 However, these are no more than a portion of the public-service corporations exempt from corporations tax. Readers should be sure to refer to Article 4 of the Corporations Tax Law and Table 2, found at the end of the Law. In addition there are a further 171 special corporations and independent administrative corporations (as at 1 February 2003). These are all exempted from corporations tax and are referred to below as "tax-exempt corporations".

Both the investments and consumption of these tax-exempt corporations are included in the respective private and public sections of Japan's GDP calculations.*3 It follows that if tax-exempt corporations are actively investing and consuming, there will be a corresponding increase in GDP. However, as these corporations are treated as tax-exempt from the outset, corporations tax revenue does not increase. What is more, as most tax-exempt corporations are in fields where they exert pressure on private enterprise, the more these corporations become active in investment and consumption and the more their economic activity expands the more corporations subject to taxation (chiefly joint-stock companies) are at a disadvantage. Around half of company profits is taken outside the firm as taxation whereas tax-exempt corporations are able to retain the entire amount in-house and use it for investment. There are no private enterprises that can compete with tax-exempt corporations under these conditions. Even the manner in which tax-exempt corporations exert pressure on corporations subject to taxation incurs a reduction in tax revenues. Those who believe that private enterprise is evil criticize the fact that profit-making enterprises distribute profits to shareholders and defend the legitimacy of public-service corporations. However whilst companies and public-service corporations compete in the same market, companies must pay half their profits to the state, making it utterly impossible for them to prevail over the predominance of public-service corporations. In other words, it is hardly possible for private enterprise to take on public-service corporations on equal terms under the present legal system. This is because companies bear a huge handicap. They cannot produce profits under disadvantageous conditions. It is unfair to criticize distributions from profit-making enterprises on the grounds of distribution of profits that are not produced.

Further, it has been pointed out that the capital and labor productivity of tax-exempt corporations is low and there is a great deal of waste of resources. This is predictable. Even if productivity is extremely low, as there is no flow of profits outside the corporation through taxation the set-up is such that the corporation is still well and truly operable. In the first place, whilst there is a duty imposed by law to apply accounting standards, there is no requirement that they be applied strictly, as there is no need for an accurate calculation of profits.

There are many cases where corporations exempted from corporations tax in this way are also exempt from other national or local taxes. This area is known as the government market and it is said to occupy a third of Japanese economic activity.*3 To be specific, even looking solely the 26,000 public service corporations, their annual income in 2001 actually exceeded 20 trillion yen. Moreover, 64% of that income (12 trillion 800 billion yen) was business income.*4 In other words, these are businesses that are exerting pressure on private enterprise. They are frustrating the opportunity for as many as 13 private enterprises with annual turnover of 1 trillion yen to emerge. Considering the massive scale of the business earnings of these public-service corporations, it is no great exaggeration to say that the government market occupies a third of the Japanese economy. This illustrates just how much the deregulations promoted by the Council for Regulatory Reform will contribute to the increase of tax revenues and the creation and stimulation of new industries.

As stated earlier, the investments and consumptions of tax-exempt corporations is included in the calculations of Japan's GDP. Moreover, as tax-exempt corporations are able to use the entire amount of the profits obtained through vigorous business activities, these enterprises are ever increasing in scale. This in turn increases the size of GDP. This is precisely the reason for the increased gap between GDP and tax revenues. The national perspective should be that increased GDP must mean an increase in tax revenues. If this is not the case, the capitalist structure of our nation will be destroyed. The structure of the Japanese state is that the existence of the state begins with tax revenues. It is from this perspective that I would like to propose the following reforms.

First is the amendment of the Corporations Tax Law. Corporations calculated into national GDP, whether private or public-service, should pay tax. At present, if the corporation was set up on a public-service basis it is tax-exempt. No matter on what basis a corporation was set up, since corporations receive the services necessary for their activities from the nation, the payment of consideration goes without saying. Whether a business is a public-service business or not is not at issue. This applies to the huge numbers of tax-exempt corporations that make up the current government market. Second is the abolition of the government market. At present tax-exempt corporations, whether large or small, are in competition with and exert pressure on the business activities of the private sector. It follows that there is a need for rapid law reform to deregulate and to do away with the government market. Progress is being made at the moment by means such as the privatization of the Postal Services Corporation, the four highway corporations and independent administrative corporations under the slogan "Privatize wherever Possible". There is a need for care in these circumstances in relation to the tax aspects. If tax-exempt corporations are left unchanged the real nature of the problem has not been reformed. Privatized corporations need to be made subject to taxation.

Third is the early implementation of PFI (Private Finance Initiatives - the establishment of public facilities using private funds) and the Japanese version of PPP (Public-Private Partnerships - the opening up of public services to private enterprise). Even in Japan local governments have recently been gradually permeated by the PFI and PPP methods of the UK that utilize private vitality, however as yet they are primarily being put into practice in the establishment of new public-service enterprises. The time of PFI and PPP that transfers the currently active businesses of tax-exempt corporations to the private sector is yet to come.

Fourth is the incubation of intellectually creative industries and new growth industries. Japan is under pressure to switch from the industrial structure of the past, which produced goods, to an intellectually creative industrial structure. Japan's intellectually creative industries are almost all held by the public sector or the government market. In the US and the UK, however, unlike in Japan, the private sector is in charge. This means that Japan's intellectually creative industries struggle against a double barrier. No only must they face the development race against the established industries of the US and the UK, but they must also struggle with national regulations and the existing power structure. The currently topic Special Structural Reform Zones Law will be the mechanism by which this is reformed. To begin with education, medical services, welfare and childcare provided by joint-stock companies, each is a field producing significant tax revenue. However, there has been an excessive reaction and there is strong opposition and resistance. Even so, the core problem is not at the level of the continued existence of tax-exempt corporations. From the perspective of securing the tax revenues of a country that has the principles of a free state as its basis, it is a principle connected to the fate of the nation and there is no point in opposing it. This is a global tide, based on fundamentally different value standards.

There is no doubt that the prescription for Japanese revitalization (Japanese rebirth) has become apparent. The issue is the resolve and power to act to implement the prescription. The magnificence and completeness of our ideas is already insufficient for the future. Our future will rather be decided by our rapid and ongoing implementation ability. Both politics and business management have this point in common. The current Japanese reforms are lacking in the capacity for rapid implementation. The "Shape of Japan" has become clear; what is now being debated is not the economic conditions that need reform or social conditions. There is nearly complete consensus on the points of discussion from here on in. In order to implement the reforms either all the fetters of the current laws must be amended or new laws must be made. It is true that "All reform must begin with law reform". It goes without saying in a democratic state that "All reform begins and ends with laws". However in Japan there is no practice of summarizing and concluding one's own issues or discussion with a definite indication of which provisions of which laws should be reformed in which way. This is due to the fact that both our national leaders and the general populace lack a 'legal mind' (the handling of the resolution of issues by means of legal concepts). It is predetermined that in a state under the rule of law, issues must be resolved in accordance with rules (rules and regulations) laid down by laws. Nowadays the laws made by the Diet (or local government) are the rules that apply to all the people, even when those rules on resolution, such as those on breaches of traditional Japanese customs, lack compassion. Citizens who disagree are welcome to develop the habit of reforming inconvenient laws, as no matter what one says, the law brings both happiness and misery and rules our lives.

*1
Cabinet Office Economic and Social Research Institute home page "SNA (National Accounts)" http://www.esri.cao.go.jp/index.html

*2
Home page of Mr. Tetsuji Nakamura (Japanese) Koeki hojin no kaikaku ni tsuite [On the Reform of Public-Service Corporations] http://www.tetsu-chan.com/

*3
Civil Code Article 34 corporations, incorporated educational institutions, incorporated social welfare institutions, incorporated religious institutions and incorporated NPOs are included in the calculation of GDP under the item for private non-profit groups. Special corporations and independent administrative corporations are divided into two groups pursuant to 93 SNA, those treated as private industries and those included in government service producers. Details can be found on the Cabinet Office Economic and Social Research Institute's home page (Japanese) at Minkan hieiri dantai jittai chousa kekka [Results of the Survey on Private Non-Profit Groups] http://www.esri.cao.go.jp/jp/sna/hieiri/h13/main.html
and at 93 SNA Suikei shuhou kaisetsusho [Explanation of 93 SNA Estimates Methods]
http://www.esri.cao.go.jp/jp/sna/071011/suikei.html

*4
Ministry of Public Management, Home Affairs, Posts and Telecommunications home page (Japanese) Koeki hojin no jitsuo? [The Facts About Public-Service Corporations] http://www.soumu.go.jp/daijinkanbou/kanri/h13koueki/2.html