Chapter 3
PROSPECTS FOR GOVERNMENT OUTLAY, AND CORRESPONDING TAX CHANGES RECOMMENDED
In planning a reform of the entire tax system it is essential to consider how large the government's expenditures may be. This does not mean that the expenditure total should be set first, and the tax system made to fit it, regardless. The two sides of the budget account must be planned together.
Beyond some point, additional government expenditures can be financed by the tax system only at a high cost in terms of unfairness and inefficiency. The tax administration becomes overstrained. Taxpayer morale declines. If additional government outlays are met under these conditions by raising direct taxes, delinquency and arbitrary reassessments arise, producing serious inequities. If indirect taxation is increased, the low-income groups are forced to pay more than they should. Moreover, he pressure of heavy indirect taxation may distort methods of doing business. Extreme taxation may even cause the total volume of production to decline. Consequently, the urgency of the need for additional government services must be balanced against the difficulties that develop in the tax system when it is expanded to raise the additional money.
Difficulties of this kind are being encountered in Japan at the present time. In part, they will disappear as time passes and the Japanese taxpayer and administrator become accustomed to the recent changes. It has been only two years since Japan adopted many of the elements of a modern tax system, including a personal income tax applying to almost every family in the country.
Strictly speaking, the subject of government expenditure falls outside the scope of our report. Still, while not recommending any particular expenditure program, we may note some general impressions we have obtained regarding the urgency of the need for government expenditures compared with the degree of strain that is being placed on the tax system.
The national government budget has a general account, into which flow the tax revenues, the tobacco monopoly profits, and certain miscellaneous recurring revenues. It also has a series of special accounts, the most important of which, for the present discussion, is the Counterpart Fund. This Fund is fed from the proceeds of the sale, by the Japanese government to the Japanese people, of foodstuffs and other items that it receives from the United States under the program of America aid to Japan.
The outlays of the general account include those for the usual services supplied by a national government. There are, however, no expenditures for any army, navy, or air force, and practically no outlays on account of veterans or for interest on a national debt. On the other hand, there are heavy expenditures for subsidies to business firms to enable them to sell their products at a low price, well below cost of production. There are also substantial expenditures for occupation costs, called "Termination-of-war-expenditures", (which, however, are more than matched by United States aid, which is reflected in the Counterpart Fund). The national budget also carries a considerable outlay in the form of grants and subsidies to the local governments. Finally, for the current year, there is a substantial surplus which will be devoted to debt retirement.
The receipts of the Counterpart Fund will be utilized chiefly to make advances to government and private corporations for investment in new plant and equipment and rehabilitation of old equipment. A substantial part of the Counterpart Fund's receipts, however, will be devoted to retirement of the national debt.
The forty-six prefectures and the thousands of municipalities (cities, towns, and villages) get more than half their current revenues from taxes, fees, etc., of their own (excluding voluntary contributions). The rest of their revenue comes from the grants and subsidies by the national government, mentioned above. In addition, the localities are covering part of their outlays by increasing their debt.
A general survey of these national and local outlays, as planned for the current fiscal year and as anticipated for the coming year, leads us to the following conclusions:
First, the need of the local governments for additional outlays to perform the functions that have been allotted to them is substantial.
Second, the need for continuing price subsidies is not so urgent. The cost of continuing them at their present level is too great, in terms of the strain on the tax system.
Third, the need for retiring the public debt next year at the same rate as this year is not, by itself, urgent enough to warrant a continuation of the present level of rates of taxation, in view of the alternative method available for debt retirement. We believe that the danger of a resumption of inflation is by no means past. National debt retirement should continue, and on a scale great enough to more than balance, by a considerable amount, the concurrent increase in the local debt. This key element of the Dodge Stabilization Plan must be carefully preserved. But the quantitative question as to just how much debt should be retired in 1950 cannot be answered at the present moment (August, 1949). If it proves necessary to continue in 1950-51 the same substantial debt retirement that is scheduled for 1949, our only point here is that a larger part of that load should be assumed by the Counterpart Fund, and a correspondingly smaller part by the tax system. Specifically, the Counterpart Fund would have to decrease its outlay for investment, and increase its outlay on debt retirement, because of the undue strain on the tax system that would otherwise occur.
On balance, it is our impression that the total tax system, national and local, should be asked to yield in the fiscal year 1950-51 an amount slightly less than is budgeted for the current fiscal year. Local tax revenues should increase, and national tax revenues should decline by a moderately larger amount. This conclusion assumes that grants by the national government to the local governments would increase, and other national expenditures in the general account would decline markedly. These remarks do not include the so-called voluntary contributions that are being collected in localities throughout Japan to build schoolhouses and to finance other local activities because the governments lack adequate revenue or borrowing power. But these informal contributions may well be counted as taxes for most purposes, since they are taxes in almost every sense except the legal one. If contributions are so counted then our recommendations call for an appreciable decrease in the total of national and local taxes, since our program assumes that most of these contributions will not be repeated next year, in view of the added tax revenues given to the localities.
To give some quantitative expression to these considerations, the following skeleton tables are presented. The question marks in the Counterpart Fund table indicate that it is too early to make assumptions about the best possible distribution of the Fund's resources between investment and debt retirement. Indeed, it is not yet settled how much of the current year's Fund receipts will go for debt retirement and how much for investment. The question marks opposite the voluntary contributions item indicate that the amount is not known, and the estimate here may be greatly in error.
The table indicates our general impression that it would be advisable to reduce the total tax revenue by some 20 billion yen next year, by reducing the national tax revenue about 60 billion yen while increasing local tax revenue 40 billion yen. If the voluntary contributions are counted as taxes, we are recommending a reduction in total tax revenues by 50 billion yen.
In terms of decreases in tax rates, the relief contemplated for 1950-51 is considerably more than these figures reveal. For several reasons, given in detail in Chapter 4, the personal income tax rates can be decreased substantially, with the expectation that the actual loss in revenue will be considerably less than proportional to the cut in rates.
| Fiscal Year 1949-50, as in Budget | Fiscal Year 1950-51, Assumptions | Difference | ||||
|---|---|---|---|---|---|---|
| A. National Government --- General Account | ||||||
| Outlays | ||||||
| Debt retirement, general account | 60 | 30 | -30 | |||
| Grants to local governments (including distribution of share in income and corporation tax) | 143 | a | 165 | +22 | ||
| Other outlays | 502 | 451 | -51 | |||
| Total | 705 | 646 | -59 | |||
| Receipts | ||||||
| Taxes, and tobacco monopoly profit | 635 | 576 | -59 | |||
| Miscellaneous receipts | 70 | 70 | 0 | |||
| Total | 705 | 646 | -59 | |||
| B. National Government --- Counterpart Fund | ||||||
| Outlays | ||||||
| Debt retirement (minimum) | 63 | 63 | ? | 0 | ? | |
| Investment (maximum) | 77 | 77 | ? | 0 | ? | |
| Total | 140 | 140 | ? | 0 | ? | |
| Receipts | 140 | 140 | ? | 0 | ? | |
| C. Local Governments | ||||||
| Outlays | 376 | 425 | +49 | |||
| Receipts | ||||||
| Local taxes | 150 | 190 | +40 | |||
| Rents, fees, etc, | 25 | 25 | 0 | |||
| Subsidies and grants from national government | 143 | a | 165 | +22 | ||
| Borrowing, net (23-5) | 18 | 35 | +17 | |||
| Voluntary contributions & special assessments | 40 | ? | 10 | ? | -30 | ? |
| Total | 376 | c | 425 | +49 | ||
| D. Consolidated Statement: National (General Account and Counterpart Fund) and Local Governments | ||||||
| Outlays | ||||||
| Debt retirement, net | 105 | 58 | ? | -47 | ? | |
| Grants to local governments (including distribution share in income & corp. tax) | 143 | a,b | 165 | b | +22 | b |
| Investment outlays by Counterpart Fund | 77 | 77 | ? | 0 | ? | |
| All other national government outlays, including investment outlays, from general account | 502 | 451 | -51 | |||
| Local outlays | 376 | 425 | +49 | |||
| Total | 1060 | 1011 | -49 | |||
| Receipts | ||||||
| Taxes, and tobacco monopoly profit | 785 | 766 | -19 | |||
| Subsidies and grants from national government | 143 | b | 165 | b | +22 | b |
| Miscellaneous receipts, rents, fees, etc. | 95 | 95 | 0 | |||
| Voluntary contributions and special assessments | 40 | ? | 10 | ? | -30 | ? |
| Counterpart Fund Receipts | 140 | 140 | ? | 0 | ? | |
| Total | 1060 | 1011 | -49 | |||
a Gross, before deducting 5billion yen to be repaid by localities in this year.
b Excluded from the total, to avoid double counting.
c Budgeted figure of 341 billion yen, plus expenditures financed by contributions, minus minor adjustments.
For the remainder of the current fiscal year, 1949-50, it appears possible that the national government's expenditures may be slightly reduced below the original budget levels. In any event, the income tax situation is serious enough to require putting into effect this year some of the reform measures recommended for that tax. We are assuming about 5 billion yen reduction in national tax revenue from the budget estimates for this year, compounded of a 15 billion yen decrease in income tax revenue resulting from these reforms, and an increase of nearly 10 billion yen in liquor tax revenue. The details of these changes are given in Chapters 4, 5 and 8.
While the outlay figures in Table 1 are expressions of our opinion, rather than firm recommendations based on detailed study, tax figures in that table are to be taken as reflecting the results of our four-months' study of the Japanese tax system. They imply a large number of changes in that system. Table 2 gives the more important of those changes, in terms of increase and decrease of revenue in 1950-51 over the amounts budgeted for 1949-50. The personal income tax revenue is to be reduced from 310 billion yen to 290 billion yen, the latter figure including 2 billion yen from a tax on individual net worth.
The increase of 8 billion yen in the revenue from the corporation income tax represents the net effect of three recommendations: repeal of the excess profits tax, allowance of revaluation for depreciation computation, and taxation of revaluation write-ups. The estimate of 35 billion yen for 1950-51 is conservative, in the light of corporation tax collections in recent months. It might easily be 40 or 50 billion yen (Chapter 7, Section A). The increase of 15 billion yen in liquor tax revenue reflects a recommendation for raising the rates of liquor taxes. The textile taxes are recommended for repeal, with a loss of 17 billion yen. Repeal of the transactions tax is also recommended, but only if government expenditures are decreased as assumed in Table 1. If the national government's outlays decline only slightly in 1950-51, to 680 billion or thereabouts, we recommend that the transactions tax be retained.
On the local level, if, as seems to us desirable, it is assumed that the prefectures will raise no more tax revenue in 1950-51 than they are scheduled to raise in 1949-50, the following tax changes are recommended:
The prefectures should no longer participate in the inhabitant's tax or the land and house tax, but should gain exclusive control over the admissions tax and the amusement tax, and should get all the revenue from a revised enterprise tax. The new enterprise tax, as explained in Chapter 13, should be levied on a somewhat broader base than net income. It is also recommended that the admissions tax rate be lowered to 100 percent and that the real property acquisition tax be repealed.
As to the municipalities (cities, towns, and villages), it is assumed that they will need to raise some 40 billion yen more in taxes of their won in 1950-51 than in 1949-50. If this assumption is granted, the municipalities should be given sole use of the inhabitant's tax and the land and house tax. The inhabitant's tax should be revised and strengthened to yield nearly 40 billion yen more than its estimated 23 billion yen of this year. The land and house tax should be thoroughly reformed and extended, becoming a tax on land and depreciable property, to yield nearly 50 billion yen in place of only 14 billion yen. The enterprise tax, as indicated above, should be removed from the municipalities; so too should the admissions and amusement taxes. The municipalities would also lose revenue through repeal of the real property acquisition tax.
It is also assumed, however, that if the municipalities are given these added tax powers, they will greatly reduce the demands they make on their citizens in the form of "voluntary contributions". These contributions, which are akin to taxes in fact, do not appear in any budgets. We have been unable to determine reliably how large they are in total, but if they amount to 40 billion yen in the current year, it is assumed they will fall off to 10 billion yen in 1950-51. The revenue from these contributions is not entered in Table 2.
The recommendations regarding the proposed 12 billion yen from "other taxes" are given in Chapter 13.
| Fiscal Year 1949-50, as in Budget | Fiscal Year 1950-51, Assumptions | Difference | ||||
|---|---|---|---|---|---|---|
| A. National Government | ||||||
| Personal income tax | 310 | 290 | -20 | |||
| Corporation income taxes | 27 | 35 | +8 | |||
| Death and gift taxes | 2 | 2 | 0 | |||
| Tobacco monopoly profit | 120 | 120 | 0 | |||
| Liquor taxes | 65 | 80 | +15 | |||
| Textile taxes | 17 | 0 | -17 | |||
| Commodity taxes | 27 | 27 | 0 | |||
| Transactions tax | 45 | 0 | a | -45 | a | |
| Other internal taxes | 22 | 22 | 0 | |||
| Total | 635 | 576 | -59 | |||
| B. Local Governments: Prefectures | ||||||
| Inhabitant's tax | 11 | 0 | -11 | |||
| Land and house tax | 7 | 0 | -7 | |||
| Enterprise tax, income basis | 26 | 0 | -26 | |||
| Enterprise tax, value-added basis | 0 | 44 | +44 | |||
| Admissions tax | 5 | 10 | +5 | |||
| Real property acquisition tax | 6 | 0 | -6 | |||
| Amusement taxes | 6 | 12 | +6 | |||
| Liquor consumption tax | 2 | 0 | -2 | |||
| Other taxes | 8 | 5 | -3 | |||
| Total | 71 | 71 | 0 | |||
| C. Local Governments: Municipalities | ||||||
| Inhabitant's tax | 12 | 60 | +48 | |||
| Land and house tax | 7 | 52 | +45 | |||
| Enterprise tax, income basis | 26 | 0 | -26 | |||
| Admission tax | 9 | 0 | -9 | |||
| Real property acquisition tax | 6 | 0 | -6 | |||
| Amusement taxes | 6 | 0 | -6 | |||
| Liquor consumption tax | 2 | 0 | -2 | |||
| Other taxes | 11 | 7 | -4 | |||
| Total | 79 | 119 | +40 | |||
a Repeal of the transactions tax is not recommended unless total national government outlays are in fact reduced to the level in Table 1.
[# end of chapter 3]