Chapter 11
THE INHABITANT'S TAX

The inhabitant's tax is a combination poll tax and tax based on income or some other index of tax taxpaying ability. Both the prefectures and the municipalities impose the tax. (here and elsewhere in this report the term municipalities means cities, towns, and villages). The municipalities collect the tax, and remit the prefectures' share. In the current fiscal year the inhabitant's tax is expected to yield 23 billion yen at a minimum; more likely, the total will be nearly 27 billion yen. Not quite half of this amount will accrue to the prefectures, the balance to the municipalities. One-fifth or more of the total revenue comes from corporations.

The determination of the amount of tax owed by each individual in accomplished in a peculiar manner. First, the prefecture decides how much inhabitant's tax it is going to get from each taxpayer on the average. The municipality does the same. Both bodies are guided by the "standard" average amount that is fixed by national law, but this standard can be exceeded by 100 percent at the will of the locality. It can be exceeded by even more if the action is not vetoed by the Prime Minister (represented by the Local Tax Deliberation Committee), and such vetoes have apparently been rare. For the current fiscal year the standard average rate is 700 yen per taxpayer for prefectures and 750 yen for municipalities. Last year it was 450 yen for prefectures and 450 yen for municipalities. In one area in Hokkaido the rate applied last year was 10 times the standard rates. So high a rate is quite exceptional, but it is fairly common for the standard rate to be exceeded by 20 percent.

Once the prefecture has decided how much it is to obtain on the average, it multiplies this figure by the estimated number of taxpayers and then allocates the resulting estimate of total revenue among the various municipalities for collection by them. The allocation is based largely on the relative populations of the municipalities, but income and property are often given weight. Once this process has been completed, the prefecture's activity ceases, except to receive the tax money after the municipalities have collected it, and pursue the delinquent taxpayer.

Meanwhile each municipality determined, too, what average rate of tax and therefore what total revenue it shall collect from its inhabitants for its own purposes. It adds this total to that allocated to it by the prefecture, thus ascertaining the total inhabitant's tax revenue it must collect. Then comes the task of allocating this total sum among the inhabitants, to determine how much each one shall pay.

First, a per capita, or poll tax rate is set. The yield of this part of the tax is subtracted from the total necessary yield. The remainder is prorated among the inhabitants on any one or more of several bases. The one most commonly used is income. When possible, the inhabitant's tax is levied on the income reported to the national tax office in the taxpayer's national tax return. In many cases, however, the individual's income has been so small that he has filed no national return. In other cases, he has had his full tax deducted at source, possibly in another city. The municipal tax officers then use external indices of income, or require a statement from the inhabitant's employer.

In most of the smaller villages, particularly those under 5,000 population, and in most of the towns, reliance is placed, not on income, but on a complicated ranking system. In this system many factors are taken into account, even social prestige. The ranking is done by the mayor with the assistance of community officials and leaders. Many, if not all, of the larger municipalities use property factors in addition to income. The rates applied are usually flat rather than progressive, though allowance is often made for dependents.

The sum thus allocated among the individuals includes, of course, the portion that is to go to the prefecture. The individual allocation method, however, need not be the same as, and usually has little relation to, the allocation method by which the prefecture determined how much of its total was to be raised by each municipality.

The inhabitant's tax in its present form (at least as a municipal tax) dates back to 1940, and can be traced farther back in the form of a household rate tax. It appears to be regarded generally as a suitable method of raising local revenue. We recommend that the tax be retained ad strengthened, provided the following changes are made;

1. The tax should be reserved for the municipalities. It is likely that the municipalities will show somewhat more energy and skill in assessing and collecting the tax if they receive the entire proceeds.

Another reason for turning all of the inhabitant's tax over to the municipalities is that we are recommending that the admissions tax be transferred to the prefectures. And our general program for local finance calls for strengthening municipalities more than prefectures.

2. The municipalities should be restricted to using income as the base for allocating that part of the tax not covered by the per capita rate. The present system of ranking in the small villages and towns is too haphazard, especially if, as we recommend, the total revenue from the tax is to be substantially increased. The bases other than income that are used by the larger municipalities often include a heavy property element. Since we are recommending a large increase in the house and land tax, and national tax on the net worth of wealthy individuals, we believe property should not enter into the determination of the inhabitant's tax.

The per capita element of the tax should be limited in some manner; the following amounts are suggested as maxima, though not definitely recommended:

3. Corporations should not be taxed under the inhabitant's tax. The stockholders will be taxed as they receive dividends, or realize capital gains from the sale of their stock, under the income element in the inhabitant's tax.

4. The income element in the inhabitant's tax should be in the form of a local addition to the national personal income tax. Each municipality should be given the option of using any one (but not more than one) of three types of tax: (a) a flat percentage of the national income tax payable by the inhabitant; (b) a tax levied on the amount of income, after exemption and deduction for dependents, reported in the inhabitant's national income tax return; (c) a tax levied on the income after exemption, deduction for dependents and national tax, that is, the income ad defined in (b), minus the national income tax. The taxes levied in (b) or (c) could be either at a flat rate or at progressive rates, at the option of the municipalities. But under option (a), the tax should in no case be allowed to exceed 20 percent of the national tax; if option (b) is elected, the maximum rate should not exceed 10 percent; and if option (c) is used, the maximum rate should not exceed 20 percent. Option (c) is more suited for a flat rate, if the aim is to raise a large amount with a flat rate.

5. An inhabitant, for purposes of this tax, should be defined as follows:

Any individual who is of legal age and who receives income from employment, property, or business, except that a wife who earns income that is included in a joint return for national income tax purposes is not to be considered an inhabitant for purposes of this tax. Any employed person, or owner of a business, or non-resident property owner is to pay one inhabitant's tax, this to be paid at place of residence.

6. Exemption from the tax should be granted only to individuals who are unemployed and on relief, or suffering other extra-ordinary hardship.

7. Each municipality should submit to the taxpayer, with the tax bill, a statement showing precisely how the amount of his tax has been computed.

8. The reason for recommending the use of the national income tax returns to supply the base for the inhabitant's tax is to avoid duplicate administration. But the localities must not be left at the mercy of an occasional inefficient or possibly even corrupt national tax office. Consequently, if the municipality submits data to the Local Finance Commission (Chapter 2) that show substantial under-assessment of incomes in a significant number of cases, that municipality shall be granted power to make its own assessments for the income element of the inhabitant's tax. The Local Finance Commission should interpret this provision liberally in favor of the municipalities. In fact, we should expect to find more than one municipality -- but not many -- making its own assessments, for at least a few years.

The maximum yield of the per capita element of the tax would be somewhere near 15 or 20 billion yen, under the limits suggested above. We do not assume, however, that the maximum is to be levied in every case. If the municipalities are to get a total of about 60 billion yen a year from the inhabitant's tax, most municipalities will be levying their income tax rates not far below the maxima recommended in No.4 above.

[# top of this page ]

[# the end of Chapter 11]