Chapter 10
OTHER INDIRECT TAXES AND CUSTOMS DUTIES
- # toc of this chapter --- e-text only.
- Section A - Transaction Tax
- Section B - Commodity Excises
- Section C - Textile Taxes
- Section D - The Sugar Tax
- Section E - The Gasoline Tax
- Section F - Customs Duties
- Section G - Other Indirect Taxes
- Section H - Social Security Taxes
- Section I - Government Monopolies Other than Tobacco
A. Transactions Tax
On September 1, 1948, the transaction tax became effective. It is imposed at a rate of 1 percent on sales. It is not applied to wage payments, transactions involving staple foods falling under the food control law, transactions involving government subsidies or price adjustments, sales of agricultural, forestry, livestock or marine products by the original producer, rentals, export transactions, sales of securities, transportation, and certain other less important items. It applies at all levels, producing, wholesaling, and retailing, and in this respect resembles the French turnover tax.
Until early in 1949 the tax was collected largely by advance sale of stamps to the vendors. This method produced so much complaint from the taxpayers that the Japanese Government eliminated the provision. The tax is now collected monthly, on the basis of a return submitted by the taxpayer. Establishments with gross sales of less than 30,000 yen a month are exempt.
The transactions tax has not yet demonstrated that it can yield much revenue. In the seven months ending March 31, 1949 the tax produced 6.1 billion yen in "cash" tax (tax on basis of return filed by taxpayer) and 14.7 billion yen from the sale of stamps. Not all the amount received from the sale of stamps should be attributed to that fiscal year, however; it appears that some taxpayers bought so many stamps that they are still turning them in, in payment of the transactions tax during the present fiscal year.
The estimate of yield for the present year is 45.1 billion yen. This if after subtracting some 4 billion to allow for the use of stamps bought in the previous year, expected to be turned in, in payment of this year's tax.
The transactions tax, or turnover tax, is the least refined member of the sales tax family. It favors the vertically combined firm, which starts with its own raw materials and also produced and sells the finished product. A competing group of independent firms comprising raw materials producers, manufacturers, wholesalers and retailers is at a disadvantage under a transactions tax, for there is a tax to pay at each turnover, while the vertically integrated firm pays the tax only once. This point is discussed further, and illustrated, in Chapter 13 below, on the enterprise tax. This unfairness, and economic danger, is not acute so long as the rate is 1 percent, though it may be important even then in some cases. But if the rate were raised to 2 percent, the inducement to vertical combination would become strong. The retail sales tax and the value-added tax (see Chapter 13), do not have this defect.
A nation-wide retail sales tax is probably not practicable in Japan at the present time, in view of the large percentage of business done, especially outside the large cities, by small retail shops whose accounting records are inadequate or non-existent. An exemption of so many yen sales per month, if made high enough to eliminate retailers with inadequate records, would cut out a large part of the total tax base. A tax limited to producers involves too many special administrative provisions, necessary if multiple taxation is to be avoided.
The transactions tax requires of course that the taxpayer submit a statement of gross receipts. It is said that this feature is an aid in administering the income tax on self-assessed business men. Once the gross sales of the taxpayer are known, an intelligent guess may be made at to his net income. Still, it is difficult to see why a tax on gross sales makes it any easier to get a gross sales statement from the income taxpayer. Its effect would seem to be the reverse; if the taxpayer reveals his gross sales, he not only lays himself open to an income tax reassessment, but also to a 1 percent sales tax reassessment. There is nothing to prevent the tax administrator from requiring the income taxpayer to submit a monthly statement of gross receipts.
Moreover, the evidence at hand, including some impressions gained on our filed trips, suggests that the transactions tax is not being administered any better than the income tax, or the liquor tax - indeed, not nearly as well as that part of the income tax that is collected at source.
The transactions tax, like any sales tax, is also commonly criticized on the grounds that it strikes too heavily at the poor, and is regressive, rather than progressive, when it is reckoned as a percentage of the consumer's personal income. In the present case, the exemption of staple food and dwelling accommodation makes this argument less applicable. More serious, perhaps, is the inequity that results when a business taxpayer fails to shift the tax. A tax of 1 percent on gross income represents a substantial percentage of net income. If the merchant gets an average profit of 5 percent on sales, for instance, a 1 percent tax on sales, if he fails to pass it on to someone else, becomes a tax of 20 percent on his net income. An industrialist who makes as much as 20 percent on sales finds the 1 percent tax equivalent to a tax of 5 percent on income.
Altogether, the transactions tax is one of the least promising members of the present Japanese tax system. It cannot be raised substantially without grave economic disadvantages. It is not likely to be taken very seriously by either tax administrator or taxpayer at its present rate, and thus may decay gradually into a tax that is largely unenforced.
We therefore recommend that the transactions tax be repealed, but only if the expenditures of the national government are reduced to the level indicated in Table 1 in Chapter 3 above. In other words, we recommend that priority in reduction of national taxes for 1950-51 be given to the income tax reductions recommended in Chapters 4 to 7 above (including corporation taxes), the repeal of the textile taxes and the reductions in commodity taxes (Chapter 10). At the same time we give equal importance to the increases recommended above in the liquor tax rates and the introduction of a net worth tax and an accessions tax. If, after all these changes, the outlay of the national government falls to the levels assumed in Table 1, the transactions tax should be repealed, effective as of April 1, 1950.
B. Commodity Excises
A series of manufacturer's excises are levied on a large number of specified articles. There are five rates: 100 percent, 80 percent, 50 percent, 30 percent, and 20 percent. Since these rates are on the producer's price, they are equivalent to much lighter retail rates. For example, an article that would sell at retail for twice the manufacturer's price if there were no tax on it, and that falls in Class A, 100 percent rate, pays a tax equivalent to 50 percent of what the retail price would be if there were no tax.
In general, we recommend the continuation of these excises. They are an indirect way of taxing personal ability to pay, as indicated by luxury or semi-luxury expenditures.
The 100 percent tax on the Group A commodities supplies very little revenue -- about 140 million yen out of an estimated total of 27 billion yen for the current year. This is said to be partly because of widespread evasion. It has been estimated from data furnished by the Finance Ministry that a decrease only to 90 million yen a year would result if the rate is cut to 50 percent. Although in principle we do not believe that the 100 percent rate is too high for super-luxuries like precious stones, etc., we recommend a reduction in the rate to 70 percent purely on administrative grounds.
Group B commodities include cameras, photographic equipment, phonographs, guns, binoculars, certain musical instruments, and lighters, and are taxed at 80 percent. This rate is estimated to yield 1.3 billion yen, and cutting the rate to 30 percent would, it has been estimated, decrease the yield to 611 million. We recommend that the rate on Class B Commodities be decreased to 60 percent.
Group C commodities are now taxed at 50 percent. They include records, electric fans, electric and gas stoves, refrigerators, safes and steel furniture, fireworks, and trunks. This tax is estimated to yield 5.3 billion yen in the current year. From related estimates furnished by the Finance Ministry, it appears that a decrease in the rate to 30 percent would decrease the revenue to 3.6 billion. However, this seems too great a sacrifice of revenue. The tax rate on these articles should in principle not be quite so high as those on Class B. But the difference is not great enough to warrant such refinement in practice. We therefore recommend that the articles in Class C continue to be taxed at 50 percent. This is equivalent to a 25 percent retail tax, approximately.
Group D articles includes sporting goods, clocks and watches, fans, bamboo-blinds, radio receivers, flashlights, adding machines, and typewriters. The present rate of 30 percent should be retained. It is the equivalent of only 15 percent or 20 percent at retail. This category is estimated to yield 7.3 billion yen this year.
Group E articles include electric light bulbs, sewing machines, small size automobiles, safety razors, footwear including shoes, plate glass, and carpets and rugs. The tax rate is 20 percent and the estimated yield, 10.6 billion yen. We recommend retaining this rate also, except that footwear, including shoes, should be exempt, as being necessaries. This exemption would lose only 276 million yen in revenue.
The preceding groups comprise "Class I [# Greek Digit One]" articles. Class II [# Greek Digit Two] consists of five commodities on which specific tax rates are levied: Matches, 6 yen per 1000 pieces; wheat-gluten, grape sugar, and malt sugar, 2700 yen per 100 kin (1 kin = 1.323 lbs. = 600 grams); saccharine and dulcin, 6000 yen per 1 kilogram; honey, 2700 yen per 100 kin; and green tea, 50 yen per kan (1 kan = 8.267 lbs. = 3.75 kg). The estimated yield this year is 2.5 billion yen. We have not been able to study each of these five cases enough to present recommendations on them, and suggest that they be kept at present levels pending further study. Such study should ascertain whether the great rise in prices has made these specified tax rates too light, and it should also consider the possibility of changing the rates to ad valorem.
The yield of the commodity taxes for 1950-51, under the rates recommended here, and assuming a slight increase in output, may be set at the same level as for 1949-50, that is, 27 billion yen.
Some changes with respect to particular items seem called for. We cannot go through the entire list here, but we recommend one general principle: commodities that are used wholly or chiefly in business, like adding machines, should be completely exempt from these excises. The concept of a luxury expenditure is not generally applicable to outlays on plant and equipment of a business.
C. Textile Tax
This tax is imposed on the producers of silk, rayon, woolen, cotton, and staple fibre goods. The rate is 40 percent on silk, rayon and woolen goods, and 10 percent on those of cotton and staple fibre.
A tax on clothing is like a tax on food. It is a levy on one of the necessities of life. The necessities of life must sometimes be taxed; witness the tax on houses, which we recommend be increased because it is a tax peculiarly fitted for administration by localities. But no such arguments can be adduced to support a tax on the manufacture of textiles.
There is indeed a luxury element in some purchases of textiles, just as there is in some purchases of food, and in some dwellings. The luxury element may even be partly isolated and taxed, if it is conceded that silk is in general a luxury. But silk producers are having a particularly difficult time adjusting to a sharp decline in their export markets, and the readjustment, which promises to be severe in any case, would be more so if the 40 percent tax were continued.
The amount of tax revenue expected from the textile tax this year, divided by kinds of textile, is as follows, in billions of yen:
| Cotton twine | 3.7 |
| Staple fibre | .3 |
| Jute yarn | .1 |
| Synthetic fibre | a |
| Special Cotton yarn | .7 |
| Waste and old fibre | .8 |
| Yarns, not otherwise noted | .1 |
| Silk threads | 3.2 |
| Spun silk yarns | 1.3 |
| Twisted yarns | .2 |
| Rayon | 1.3 |
| Flax yarns | 1.2 |
| China grass | .9 |
| Worsted yarns | 1.1 |
| Woolen yarns | 2.0 |
| Paper threads | .1 |
| Total | 17.1 |
a. Less than 50 million yen
We recommend that the entire textile tax be completely repealed, effective as of the beginning of the fiscal year 1950-51.
However, if it were made known in September that as substantial a cut in tax as from 40 percent to zero was going to be made at the end of March, textile dealers, and to some extent the general public, would in general tend to defer their purchases of silk as much as possible until after the cut in tax. This would lead to the piling up of manufacturers' inventories and a shortage of working capital; this in turn might result in curtailed production and a temporary aggravation of unemployment in the silk industry. To avoid such an unwarranted disturbance to the industry, it is recommended that the tax on silk and rayon be reduced as soon as possible to 10 percent, if practicable, this cut should even be made effective retroactively as of September 1, 1949. The 10 percent rate would then be eliminated along with the 10 percent rate on cotton, on April 1, 1949. The loss in revenue for the balance of this fiscal year by reason of this anticipatory cut should be relatively small, since if the cut is not made the volume of sales would fall off drastically towards the end of the fiscal year and with it the revenue. It is even possible that through maintaining the volume of sales the immediate cut would actually produce more revenue, than would be obtained through the maintenance of the higher rate. It is not felt that the cut in the tax on cotton goods from 10 percent to zero is sufficient to produce such a serious announcement effect.
D. The Sugar Tax
Domestically produced sugar is taxed at the rate of 20 yen per kin (1 kin is 0.6 kilogram) if produced in Hokkaido, and 18 yen per kin if produced elsewhere in Japan. The tax yields only half a billion yen annually.
Prior to December, 1948, imported sugar was untaxed. At the beginning of December, 1948, a tax of 20 yen per kin was applied to imported sugar, both raw and refined. The tax was imposed by the supplementary budget law of October, 1948, as an emergency measure. It was allowed to expire the following April when the import price in terms of yen increased upon the change in exchange rate.
It is estimated that during the fiscal year 1949-50 over 300,000 tons of sugar will be imported, while only 10,000 tons will be produced domestically.
Imports and consumption of sugar were particularly heavy in 1948, when sugar was rationed as a staple food substitute. Since December, 1948, it has been rationed instead as part of the basic caloric ration. Coal miners and sugar beet farmers receive an incentive sugar ration in addition to their basic ration.
A number of Japanese sources have recommended the reimposition of the excise on imported sugar, at high rates, to yield large amounts of revenue. It is said that sugar is a semi-luxury and that the poorer recipients of the ration sell it on the black market. But if the authorities considered sugar a semi-luxury it presumably would not be imported. It is not the present policy to use up dollars in the purchase of semi-luxuries. So long as sugar is imported under the present policy, it cannot be taxed as a luxury, and we do not favor the taxation of food necessities. Imported and domestic sugar should be treated equally under the excise. Consequently we recommend the repeal of the tax on domestic sugar.
E. The Gasoline Tax
In the latter part of 1948 it became apparent that a gasoline tax would yield sufficient revenue to warrant its introduction. The local governments requested that this new levy be made a part of their tax structure. The Ministry of Finance, however, pointed out that the administrative problems would be reduced if the tax were on a national level since it could be collected at two import and four domestic refinery points. This reasoning prevailed, and we concur.
During the consideration of the levy certain groups attempted to have the revenue from the tax allocated to road repair. This was disapproved on the ground that budget limitations prevented earmarking specific revenue sources for designated expenditures. However, the national government does provide a large public works appropriation, and the part of this appropriation that goes for road repair and road building is in excess of the revenue yield of the gasoline tax. Furthermore, In Japan, to a much greater extent than in the United States, the roads are used by carts and bicycles, to say nothing of charcoal burning vehicles.
The gasoline tax became effective as a national government levy on May 1, 1949. The tax rate is 100 percent of the consumer retail price. For purpose of simplicity and administrative expediency, the tax is based upon the consumer price for large quantity sales. Thus the tax is 100 percent of the 16,450 yen per kiloliter consumer price (for other than small purchases of gasoline) prevailing at the time the tax was adopted, instead of the 17,200 yen price prevailing for small quantity sales. This results in a price, including tax, of about 131 yen, or approximately 30 cents, a gallon, the tax being about 15 cents a gallon.
The revenue anticipated for the eleven months of 1949-50 (actually only ten since the tax is normally collected one month later) is estimated at 4.1 billion yen, or at the annual rate of 4.9 billion yen.
A leakage and evaporation allowance of 3.7 percent reduction in tax is allowed. An additional allowance of 1 percent for interest burden was discussed, but was finally incorporated in the controlled price rather than deducted from the tax. This allowance was for the purpose of compensating the industry for the cost of borrowing funds for advance payment of the gasoline tax for borrowing funds for advance payment of the gasoline tax (or for borrowing national bonds from banks for use as collateral in payment of the gasoline tax). It is understood that the interval between payment of the tax by the industry and collection of tax at the consumer level averages from 60 to 90 days.
While the tax is borne by the final consumer, it is collected at the prime importation and domestic refinery points. At the present time, imported gasoline (which represents 92 percent of the total consumed) is taxed at just two import points. In addition, since only four of the eight domestic refineries are currently operating, gasoline tax collections are narrowed down to six points in all.
Total consumption of gasoline in the fiscal year 1948-49 was 310,095 kiloliters, of which 260,839 kiloliters, or 84 percent went to motor vehicles. For 1949-50, estimates of total consumption range from 360,244 to 418,500 kiloliters. The revenue estimate of 4.1 billion yen is based on 360,244 kiloliters.
This new tax seems reasonable and effective. It is as yet, however, too early to judge. We suggest that a study be made of the possibility of taxing other petroleum products such as lubricating oil, kerosene, etc.
F. Customs Duties
In the 1930's customs duties were a substantial part of Japan's revenue, but they now supply a negligible amount -- only three-tenths of a billion yen was estimated for the current fiscal year in the budget. Practically all the imports consist either of commodities sent from the United States under its program of aid to Japan, or of imports for the use of Occupation personnel, or imports by the Japanese Government's Foreign Trade Fund.
It is not within the scope of our report to analyze Japan's foreign trade policy or estimate its future. It is of course evident why, under present conditions, little or nothing can be expected from customs revenue. We can make only two general observations.
First, there is a customs-duties law in existence, the one enacted before the war. It has of course been badly distorted by inflation of the monetary unit, so far as its specific duties are concerned. The duties, specific or ad valorem, are not being enforced. While we agree that these customs duties should not be in effect, it is not sound policy to achieve this end by ignoring a law that is on the books. The customs duties that are not being enforced should therefore be repealed, at once.
Second, Japan does not need to resort to customs duties for the sake of revenue. Imported goods should pay the same excise taxes that are levied on domestically produced goods, but beyond this, so excuse for import duties can be found in the budgetary situation. As a tax measure, such duties, which discriminate in favor of domestically produced goods, have little or nothing to recommend them. As instruments of foreign trade policy, including subsidization of domestic industries, they lie outside our field of study.
G. Other Indirect Taxes
There are a few other national-government indirect taxes, minor is revenue yield, which we have not had time to study carefully. They are therefore only noted here, with suggestions, not to be taken as outright recommendations.
The tax on soft drinks is collected from the producers, at the rates of 4,500 yen per koku for first class drinks, 8,000 yen per koku for second class drinks. 3,000 yen per kilogram of carbon dioxide on third class drinks. These rates were established May 1, 1949, and represent a substantial reduction from the rates put into effect in July, 1948, 5,300 yen, 9,500 yen, and 3,500 yen respectively. In general, we believe that this is not a suitable kind of tax. Soft drinks compete directly, not so much with liquor (except beer, to some extent) as with ices, sweets, and similar items. These competing items cannot be taxed adequately, hence an unfair competitive relationship is caused by a tax on soft drinks alone. Moreover, even if the competing items could be reached, there seems to be no reason for special taxation of this particular group of mild semi-luxuries.
The transfer of stocks, bonds, and other negotiable certificates of indebtedness is taxed at 0.2 percent on stocks transfers by brokers, 0.4 percent on transfers of other stock certificates on stock exchanges, and 0.8 percent on all other stock transfers. Transfers of securities other than stocks are taxed at 0.1 percent, 0.2 percent, and 0.4 percent, respectively. This kind of a tax is almost universally in use, but it is difficult to find a justification for it. If it is intended to discourage security transfers (an aim that we do not share), it is hardly heavy enough t be markedly effective. The tax is largely an historical hold-over from a period when direct taxation was not developed to its present-day stage.
A tax is imposed on the charge for passenger transportation by train or ship. The rate is 5 percent, except that additional fares for berths, and seats on express trains, are taxed at 20 percent.
As a tax on luxury expenditure, the high-rate levy on special travelling facilities deserves to be retained, but there seems to be no good reason for imposing a special tax on ordinary travelling. It would therefore follow that the 5 percent tax should be repealed.
Analogous to the tax on playing cards that is commonly found in Occidental tax systems is the tax on mah-jong sets (1,500 yen per set), and other playing sets (130 yen, except "Su So Pai etc.", 30 yen). These items are presumably suitable for taxation as semi-luxuries.
There is a registration tax, comprised of a series of rates, which does not seem to be a significant revenue producer. Unless some particular reason exits for it, it should presumably be repealed.
Finally, there are a series of stamp taxes on powers of attorney, pass-books of deposits, and similar legal documents or acknowledgments of payment. These, too, are hold-over from a regime that had to depend almost entirely on indirect taxation. However, the yield for 1949-50 is estimated at 7 billion yen (this may include some of the other miscellaneous indirect taxes). It should be possible within a year or two to consider seriously the repeal of the stamp taxes; they have no real place in the long-term program.
H. Social Security Taxes
At the present time several taxes are imposed on payrolls to help finance the various parts of the social security program. The scope of our mission does not include a complete financial study of the social security program. It might be construed to cover a study of the relative merits of pay-as-you-go and reserve financing, but this was found to be inadvisable in view of the shortness of time available, and the size of the primary task of analyzing the taxes that supply the general account. Moreover, these issues have been thoroughly explored by the Social Security Mission that visited Japan in 1947, in its 260-page report of December of that year.
We do, however, think it necessary to call attention to the multiplicity of tax rates, definitions of taxable payroll and collection agencies. On the national level, both the Labor Ministry and the Welfare Ministry are paralleling the work of the Finance Ministry in collecting taxes based on payrolls. Hence many taxpayers have to deal with three sets of tax collectors and tax investigators. The result is likely to be impairment, not only of the social security program, but also of the general-revenue program. The Labor Ministry allows the employer to compute, report, and pay the payroll tax for unemployment insurance, but the Welfare Ministry requires the employer to submit payroll data and then itself computes the health insurance payroll tax. The health insurance tax is based on the first 24,000 yen of monthly wage; the old-age insurance tax (welfare pension insurance) applies only to the first 8,000 yen of monthly wage; and the national income tax collected from wages and salaries by withholding, is based on the total wage.
We therefore recommend (subject to the qualifications to be noted below) first, that collection of the social security taxes be entrusted to the Ministry of Finance, which should then integrate this collection with that of the withheld tax on wages and salaries; and second, that one tax base be used for all the social security taxes, instead of the present system with its various points at which the wages cease to be taxable. Integration of collection has recently been tried in one collection area in the United State and has been found so successful that plans are under way to extend it.
The qualification to be noted is that these changes should not be allowed to endanger any important aspect of the social security programs. For example, under the workmen's compensation law as it now stands, an employer's delinquency imperils his particular employees; they do not get their benefits unless their employer has paid the premiums. We recommend that, under integrated collection, the workmen's compensation premium have priority over the other tax claims, if a taxpayer becomes delinquent. Similar technical points may be uncovered. It is to be expected, however, that they can be overcome sufficiently to make possible the reforms suggestion here, which, if delayed much longer, may have important adverse repercussions on taxpayer compliance and hence on the tax system in general.
I. Government Monopolies Other than Tobacco
The national government monopolies of salt, camphor, and horseracing are relevant to this report only as they produce revenue.
Salt is a government monopoly because three-fourths of the salt used in Japan must be imported, and the government wishes to assure distribution of this essential item at a low price. The salt monopoly is estimated to show a loss of 3.7 billion yen for the fiscal year 1949-50. There is consequently no revenue item for us to consider. We certainly would not think of recommending that the salt monopoly be transformed into a source of net revenue to the state.
Camphor is controlled by the government largely to regulate the cutting of camphor trees, which take 40 years to reach their best level of yield. The government's monopoly is one of distribution, not of growing or refining. The camphor monopoly is estimated to yield a profit of 61 million yen this year, a negligible amount from the viewpoint of the total budget. Here, too, there are no revenue implications on which we need to comment.
The private horse-racing monopoly was taken over by the national government in 1948, and is now financially operated as a special account, under the direct supervision of the Ministry of Agriculture and Forestry. Prospects for the current year indicate that the government will obtain leas revenue than it would it if turned the business back to private hands (not necessarily a monopoly) and imposed a tax. We do not pass judgment on the aspects of this monopoly aside from the revenue considerations. Those considerations, taken in isolation, indicate that this in not a satisfactory object for a government monopoly designed to raise revenue.