Chapter 9
TOBACCO PROFITS AND LIQUOR TAXES

A. Tobacco Monopoly Revenue

Overshadowing all other indirect taxes is the net revenue from the government monopoly of tobacco manufacturing. The revenue is technically in the form of a profit on a government business operation rather than a tax. However, this profit is properly to be listed as a tax. It is far beyond the normal profit that could be expected under private competition. In the national budget for the fiscal year 1949-50 it is estimated at 120 billion yen, which is 17 per cent of total tax revenues.

This large amount of profit results from selling most of the output at prices that are several times the cost of manufacture and distribution. It is a high-price, low-supply policy. But this policy, at least the low-supply part of it, is determined largely by considerations that lie outside the field of public finance. It is the policy of the Japanese government to restrict tobacco production severely in any case, in order to have more land available for producing food.

Given only a certain amount of land on which to produce tobacco, because of food considerations, the tobacco monopoly has three options. First, it can set selling prices well below the current levels, but then it would have to ration all the output, since demand would exceed supply at those low prices. The result would be less financial burden on smokers of cigarettes.

Second, the monopoly can set selling prices that will just clear the market of the available supply. This is the policy being followed at present, except for the lowest price cigarette (Kinshi), which retails at 15 yen per package of 10. Two grades of cut tobacco are also sold at low prices, under a ration.

Even on the rationed cigarettes the government gets a profit of slightly over 10 yen on each 15 yen package of 10 cigarettes. This is equivalent to a tax of 200 per cent on the retail price. On the high-priced Hikari brand, which sells at retail for 50 yen per package of 10, the government gets a profit of nearly 43 yen per package. This is equivalent to a tax of slightly more than 600 per cent on the retail price.

The third possible policy, given a fixed physical amount of tobacco, is to attempt maximize revenue. This would involve experimentation with still higher prices than now prevail (and, of course, elimination of the low-priced, rationed tobacco), to find out whether a greater net profit could be obtained by selling still fewer cigarettes at still higher price. In that event, even less land than at present would be devoted to tobacco.

The present policy of the tobacco monopoly is in effect a combination of options one and two. We recommend no change, in general, from this policy. However, we are impressed by the amount of taxation the smoker is being called upon to bear. No doubt most families contain at least one smoker, so the discrimination is not so great as it might be. But the amount spent on tobacco by the Japanese consumer is significant. The total receipts from the sale of tobacco products to the consumer is estimated at 158 billion yen in the fiscal year 1949-50. The population of Japan is estimated at 82 million for next year. Hence the average per capita expenditure on tobacco is expected to be almost 2,000 yen per person. For a family of five, the amount spent on tobacco in the year will thus be 10,000 yen - about a month's salary, for a semi-skilled worker. The actual amount for a family of that size will, of course, depend on the smoking habits of its members; in some cases it will be less than 10,000 yen, in other cases, more. A family of this size will usually have more than one income earner, or one or more assistants in the family business or farm. But even in the case where the family income is 20,000 yen a month, or 240,000 yen a year, and expenditure of 10,000 yen on tobacco represents 4 per cent of income. Of this 10,000 yen, about 7,500 yen represents profit to the tobacco monopoly.

As soon as further national tax reduction is permissible, we recommend that it include at least some slight decrease in the burden on the smoker of the lowest-price, rationed cigarette (and cut tobacco). The burden would be decreased either by lowering the selling price or by improving the quality of the tobacco in this lowest grade. An increase in the ration could also be allowed if general policy permits the output of tobacco products to increase. These steps would also deal a severe blow to the black market in domestically produced cigarettes.

In many countries the revenue from tobacco is obtained by leaving the tobacco industry in private hands and imposing a tax on the producers or retailers. Any complete review of the tobacco situation in Japan would have to include an analysis of the relative advantages of these tow methods. The present report does not touch on that issue at all, partly because of lack of time and partly because the large amount of revenue that is produced under the present system gives no prima facie case for suggesting a change.

The profits figures given above must be taken as only approximate, The monopoly's accounting procedures have been fairly elementary. They are now in the process of being improved. Such improvement is important not only from the point of view of internal management, but also from that of taxation policy. Until it is known just how much "tax" in the form of profit each type of smoker is being asked to pay, policy recommendations in this field must be correspondingly uncertain.

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B. Liquor Taxes

The liquor tax collected by the national government consists of a series of specific rates on nine classes of liquor. The rates are expressed as so many yen per sho (1.8 liters, or 3.18 pints).

Part of the liquor supply is rationed out, at low prices, to farmers and certain workers. A low set of tax rates applies to these sales. The free-market, unrationed sales, pay a supplementary tax, in addition to the low-rate tax. The low-rate tax is collected from the brewers and distillers. The supplementary tax is collected from licensed wholesalers. These wholesalers have only recently come into existence. Before July 1, 1949, all liquor was sold to a government wholesaling Kodan, which resold it to private retailers. The Kodan was abolished as of July 1.

The tax rates on liquor, both rationed and unrationed, were reduced in May, 1949. The decreases were substantial for the rationed liquors and very large for the free sale liquors. For example, among the rationed liquors, the 2nd class sake (fermented rice-wine) tax was reduced from 245 yen per sho to 180 yen per sho, a decrease of 65 yen, or 27 per cent. On shochu (a liquor produced from sweet potatoes) the tax rate dropped from 215 yen per sho to 174, a decrease of 19 per cent. On beer the decline was from 147 yen per sho to 126, a decrease of 14 per cent.

Among the free sale liquors, the tax on 2nd class sake dropped from 635 yen per sho to 422 yen, a decrease of 213 yen, or 34 per cent. On shochu the decline was extremely large: from 585 to 257 yen per sho, a 56 per cent decrease. For beer the decline was from 367 yen per sho to 261, a decrease of 106 yen per sho, or 29 per cent.

This action was supported on the ground that it would maximize revenue. In the fiscal year 1948-49, 35 percent of the total liquor produced was free sale liquor; 65 percent was rationed. In the current fiscal year, only 27 percent of the output is to be rationed; the remainder goes on unrationed sale at a higher controlled price. The rationed liquor is to be kept down to the same price at which it sold last year, despite the rise in prices of the raw materials - rice, wheat, sweet potatoes.

As to the free sale liquor, which is, of course, considerably larger in amount this year than last, the tax rate is said to have been set by (a) estimating the selling price that would clear the market, (b) subtracting costs of production, other taxes, and wholesale and retail margins.

What result is expected from this supposed attempt to maximize the revenue? The budget for 1949-50 as drawn up last spring carries an estimate of 65 billion yen for the liquor tax. This is not much more than the actual yield in the previous fiscal year: 55 billion yen. In real terms, after allowing for the fall in the value of the yen, the liquor tax yield estimated for the present year was actually less than the collections in 1948-49. Yet this year nearly three-fourths of the liquor will be sold in the high-price, free market, against only a third last year.

The tax rate that will in fact maximize revenue cannot be known exactly, and any recommendation on this point must be largely a matter of personal judgement. In our opinion revenue could be obtained from the liquor tax in Japan today by raising the tax rates. Whether the increase should be only part of the way back or all the way back to the levels prevailing before May, 1949, or to still higher levels is a question these deserves further study. Our impression is that the rise in tax rates should be substantial. These rates are specific, not ad valorem. As the yen depreciated in purchasing power from April of 1948 to March of 1949, the specific rates automatically became lighter and lighter, in real terms. Thus, in terms of purchasing power, the liquor tax rates decreased automatically and substantially during the fiscal year 1948-49, and were then further reduced by law in May, 1949.

To such comments the objection usually made is evasion. At the old high rates, it is said, evasion was much greater than it will be at the present rates. Evasion of the liquor tax is of tow kinds: home brew by farmers, and illegal sale in the cities. The home brew evaders are not likely to be effectively restrained in any case, as experience in other countries demonstrates. As to the illegal manufacture and sale in urban areas, it may be doubted that enough vigor in enforcement has been shown in the past. At any rate it seems to be unwise to assume unmanageable evasion as a reason for setting tax rates and consumption levels of liquor at a point where the liquor tax is expected to yield only 20 per cent more yen this year than last, while the personal income tax is expected to yield over 60 per cent more than last year, the textile tax over 50 per cent more, and the commodity excises over 60 per cent more.

The 65 billion yen estimate for the current year is being raised to 72 billion yen in certain preliminary revisions of budget figures.

On all counts, liquor is a fit subject for especially heavy taxation in Japan today. It is a luxury. Even more than tobacco, it is a special object of consumption by the wealthy, particularly in expensive parties given by business firms, which are themselves a channel for evasion of income taxes.

How heavy is the liquor tax under present rates? The best gauge is obtained by expressing the tax as a percentage of the retail price of the liquor, assuming that all of the tax is passed on to the consumer. If this computation is made for each of the six grades of free sale liquor, it is seen that the tax ranges from a low of slightly more than 60 per cent, for shochu, made from sweet potatoes to a high of nearly 80 per cent for the highest grade of sake. These percentages are of the price paid by the consumer. Thus a 75 per cent tax, computed in this way, is the equivalent of a tax of 300 per cent on the retail price ex-tax.

These rates of tax, though high compared with excises generally (except the tobacco monopoly profits), are not extraordinary compared with liquor taxes in other countries. An exception is beer, which, taxed in Japan at the equivalent of about 75 per cent of the price to the consumer, is in other countries often given a much lower rate.

In addition to the national tax there is a tax of 5 per cent on the retail price that is imposed by municipalities (see Chapter 13).

We recommend that the present liquor tax rates, both on rationed and free sale liquors, be raised substantially, before the end of the calendar year 1949.

We recommend further that as soon as the local tax on retail liquor sales is repealed, as recommended elsewhere in this report, the national liquor tax rates be further raised. The increase in yield from these measures may be estimated at more than 5 billion yen for the current calendar year, 15 billion yen or more in 1950-51, and 20 billion yen or more in 1951-52.

A substantial increase should be made in the quality and the number of tax administration personnel assigned to enforce the liquor tax. In so far as possible, the general controls over the illegal use of rice should be strengthened. The liquor tax is one of the four or five most important taxes in Japan with respect to the amount of benefit that can be expected from a great increase in enforcement effort.

As a first step toward bettering the administrative situation in this field, we recommend that the state resume control of the wholesale distribution of liquor. Until this year, a state liquor trading company (Kodan) monopolized the wholesale distribution. This Kodan was abolished, and licensed wholesale liquor dealers were put in its place, for reasons not related to taxation. Ordinarily, we believe that decisions on such control measures should not be guided preponderantly, or even significantly, by taxation. But here is a case where the tax aspects are serious enough to warrant a recommendation.

Following is a comparison of the old and new liquor rates:

I. Rationed Liquors: Tax rate per sho
	Before May '49	After May '49	Change
Sake
Special class	(No such category)	354	-
1st class	330	257	-73
2nd class	245	180	-65
Imitation sake (Goseishu)
1st class	210	177	-33
2nd class	210	177	-33
Mirin
Class A	252	183	-69
Class B	252	222	-30
Shochu	215	174	-41
Beer	147	126	-21
Fruit wines	200	120	-80
Whiskey
1st class, 1st kind	2,033.5	1,800.6	-232.9
2nd class	1,080	704	-376
3rd class	561	484	-77
1st class, 2nd kind	1,776	1,630	-146
.
II. Unrationed ("free sale") liquors (basic tax plus supplementary tax)
Sake
Special class	(no such category)	848	-
1st class	770	647	-123
2nd class	635	422	-213
Imitation sake (Goseishu)
1st class	580	446	-134
2nd class	580	350	-230
Mirin
Class A	647	622	-25
Class B	647	317	-330
Shochu
Class A	585	257	-328
Class B	585	247	-338
Beer	367	261	-106
Fruit wines	200	120	-80
Whiskey
1st class, 1st kind	2,933.5	2,250	-683.5
1st class, 2nd kind	2,676	1,980	-696
Whiskey
2nd class	1,830	1,044	-786
3rd class	1,311	824	-487

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