Chapter 12
THE REAL ESTATE TAX
(LAND AND HOUSE TAX)
The "land and house tax", as the term is commonly translated from the Japanese, is levied on all types of real estate, not merely dwellings. Factory, commercial, and farm buildings form an important part of the total real estate assessed under this tax.
It is, therefore, all the more surprising to learn that this tax supplies only a negligible amount of revenue: about14 billion yen in 1949-50. The surprise becomes astonishment when it is learned that the average rate of tax is 500 percent, consisting of a 250 percent rate levied by prefectures and another 250 percent rate levied by municipalities.
The apparent paradox is resolved by the fact that the base on which the tax is levied is the estimated annual rental value as it stood before the war. Meanwhile, inflation has lifted the price level by something between 100 and 200 times the 1938 figure.
Rentals are under price control, however, and the control of rentals has been particularly severe, in law if not in practice. The average legal rent per tusbo (36 square feet) is said to be only 15 times what it was in 1939. House and land rent in 28 cities is reported to be less than 3/4 of 1 percent of total family expenditure.
The significance of these figures is modified by two facts. First, a great majority of the farmers own the house and land they occupy. And it is estimated that about half of the non-farm families are also owner-occupiers.
Second, there is commonly said to be widespread evasion of the rent control laws, largely direct, through the payment of over-ceiling rentals, and partly indirect, through the payment of "key money" and similar lump-sum payments at the time the tenant takes occupancy.
A tax on dwellings is a traditional source of large revenue for localities in most countries. It can be administered more readily than most taxes, and it bears an approximate relation to the ability of the dweller to help support the cost of local services. The tax is usually supposed to be borne by the occupier rather than the landlord, at least in the long run and with some qualification respecting the land element, as contrasted with the structure on it.
As a tax on commercial and industrial business establishments, it also has notable virtues for local use. It obliges the owners of the business, or the consumers of the product (if the tax is shifted forward in higher selling prices) to help pay for the police, fire, and other protection that the business gets from the locality. It is one of the surest ways in which the locality can reach the kind of business that is owned by non-residents and sells its products to non-residents.
In many of the small commercial and industrial establishments in Japan the place of business is combined with the house of the owner in a single structure. For the owners of those concerns, the real estate tax is a combination of a tax on personal ability to pay, and a tax on business. The same is true of farmers, but the Japanese farmer must sell his staple crops to the government at fixed prices, and crop control is enforced more strictly than urban rent control. We take account of these facts by recommending that the farmer be exempt from the enterprise tax (as revised, in Chapter 13) instead of being granted any special rates under the real estate tax.
Finally, for reasons given in Chapter 2, additional independent sources of local revenue, especially municipal revenue, are needed in Japan today, if local autonomy is to survive.
After having studied the implications for rent control and the cost of living, we conclude that the land and house tax should be thoroughly reformed so that it will yield about 50 billion yen an year, in place of the 14 billion yen estimated for the current year.
The reform of the land and house tax should include the following changes:
1. Entire responsibility for the tax should rest in the cities, towns, and villages, and all the revenue should go to them. At present, half of the revenue goes to the prefectures. The national government is also involved, since it is supposed to keep up date the ledgers in which the lands and buildings are entered, at their pre-war values. There is abundant evidence that the present division of authority is unsatisfactory. The tax should be given to the municipalities rather than the prefectures, because the municipalities are more in need of additional revenue, and because this is one of the few taxes that even the smaller municipalities can administer with a reasonable degree of success.
2. The tax should be based on capital value instead of on annual rental value as at present. We make this recommendation with some reluctance, because it is better to maintain the accustomed methods of assessment of a tax, whenever possible. But in this case there are two important advantages to be gained by the changes; and making the change will not be as difficult a task as it would be ordinarily.
One advantage is linked with the recommendation we make below,that the tax be extended to include all depreciable assets of business enterprises, that is, machinery, vats, ovens, and so on, instead of being restricted to land buildings. Such assets cannot well be included in the tax rolls on an annual rental basis. If they were valued on a capital basis and the land and buildings were continued on a rental basis, it would be necessary to distinguish between structures that are buildings (real estate) and those that are not between "immovables" and "movables". This is often a difficult distinction to draw, and the difficulty is indeed one reason why we recommend including all depreciable assets in the tax base.
The other advantage is linked with the recommendation, given in Chapter 6, for revaluation of business assets (depreciable assets and land). To avoid gross overvaluation by taxpayers seeking to increase depreciation and decrease capital gains under the income taxes, it is desirable that the tax system contain automatic checks. One of these checks is obtained by requiring that the value set for purposes of the land and house tax shall not be less than the value recognized for revaluation under the income tax, minus subsequent depreciation. To obtain this check, the land and house tax must be imposed on capital value, not on real value.
Making the change from rental value to capital value will not cause as much additional administrative trouble as usual, because most of the trouble will have to be faced anyway. Whether rental value or capital value is used, the municipalities face a huge task of revaluing all the land structures in the country. The pre-war values are, of course, hopelessly inadequate.
3. The tax should continue to be imposed on the owner of the real estate, not the occupier. At the same time, the rents fixed under rent control should b raised by the amount of the increase in tax. If the current land and house tax were tripled, that is, increased by 200 percent, and if ceiling rentals were raised by enough to cover the increase in tax, the percentage of a representative family's living expenditure going to rent would rise from 0.7 percent to 1.6 percent.
Moreover, in some cases at least, part or all of this increase would in practice be absorbed by the landlord in a reduction of the illegal rental or key money he could get from tenants. The landlord is evidently in many cases asking from the tenant all that he can pay; a rise in legal rental ceilings does not make the tenant any more able or willing to pay than the he was before.
There are some instances of the opposite case, where the landlord, through custom or contract, believes himself bound to rentals that were set long before the yen depreciated to its present value. Here, the tenants are getting an undeserved bonus, and it would be more equitable to levy the increased house tax on the occupier. But it is too difficult to distinguish these cases in practice.
4. The scope of the tax should be extended to include all assets of the business concern that are subject to depreciation allowance under the national personal and corporation income taxes. This means that inventories are not to be included; this exclusion is recommended because of administrative difficulties in valuing inventories. The name of the tax should be changed to the tax on land and depreciable assets, or, for short, although somewhat inaccurately, the real estate tax.
The expanded base of the tax, as recommended here, is a better measure of what the concern should contribute, relative to others in the community, for the support of local services. There will still be some difficulty in drawing the line between taxable property and non-taxable property (inventories versus short-lived equipment, for example), but not so much as is, or should be, encountered under the present law in distinguishing buildings from long-lived property other than buildings (buildings versus vats, coke ovens, or machines, for example).
(a) The reappraisal process should be carried out as follows, for property other than farm land.
(1) The pre-war rental values now on the ledgers should be multiplied by 200 (no exceptions are needed for rental values readjusted under the Temporary Revaluation Law of 1949 since these readjustments are on a 1936 basis). The result is a rough estimate of rental values in 1949 terms -- hypothetical free-market rental values, not the rentals actually received under rent control. This result should then be multiplied by 5, to put the estimate on a capital value basis. The result is a crude approximation of what the asset might be worth if it could be sold in a free market, or of what it would cost to reproduce the structure (after allowing for wear and tear).
This part of the reappraisal program is a purely formal step, but it has its advantages. It will serve to emphasize how inadequate are the capital values, in most cases, even when they have been obtained by multiplying the pre-war rental values one thousand times. More important, it will throw into bold relief something that is now observable only in miniature, namely, the great discrepancies in valuation among similar parcels of real estate. This formal step should be taken at once, before the end of 1949.
The capital values aimed at are those that obtain in a free market, not those that would be reached by capitalizing the present low rentals specified by rent control. Owners of old and new houses should be treated on the same basis for the purpose of contributing to the support of local government. For purposes of long-term reform, it is essential that this basis be what will obtain in a free market (and does now, as to new construction). The amount of tax to be obtained is the same in any case. Rents will have to be allowed to rise by the same amount, no matter what the base of the tax; the only difference is that if the base is lower, the tax rate must be higher.
(2) Each city should recruit and train a permanent body of real estate assessors, who would value each parcel of property once a year -- value it by actual inspection, not merely by copying last year's valuations. New valuations should be put on every parcel of property in 1950, even though it would have to be done crudely this first time. In 1951 the results would be better, and, by yearly practice, it would not be long until the assessment reached a fairly high standard of performance, assuming of course that the task is taken seriously. The thing to be avoided is the meticulous, long-drawn out valuation process of the kind that European countries tried in the 19th century, the cadastre which took decades to complete in France.
(b) Farm land cannot be valued for the real estate tax on a free market basis, as recommended above for all other property, for there is no free market in land. If the farmer sells his land, it must be at the official price, which is at present the same price he paid for it under the land reform program. And it is not possible to capitalize the farm's earning power at the usual rates of capitalization, since the farm owner does not have all the rights of ownership that attach to other property, especially the right of free sale.
We, therefore, recommend that farm land be valued at the official price, but that, for purpose of applying the rate of the real estate tax, this official price be multiplied by a tax adjustment factor. For the fiscal year 1950-51 and fiscal year 1951-52, the price adjustment factor shall be set by the Local Finance Commission (which we recommend in Chapter 2), subject to the restriction that in no case shall the adjustment factor be greater than 25 (this is set as a maximum, not as indicated figure for the Commission to adopt). The adjustment factor could differ from prefecture to prefecture, although it would seem preferable to have as little variation as is consistent with fairness in distributing the tax burden. If the official price of land is raised during those two fiscal years, the adjustment factor should be correspondingly lowered. For the fiscal years following 1951-52 it may prove possible to use the then official price of land with no adjustment factor, but this is something that cannot be predicted at this time.
In 1950, under present laws, the farmer will be paying the enterprise tax on 1949 income from non-stable crops. We recommend that the farmer be exempt from the enterprise tax on 1950 income and following years, partly because of the additional tax on his land. The first payment under the new real estate tax would come due in 1950. Some transitional measure should be worked out to obviate the double load of full assessment of both the enterprise tax and the new real estate tax on the farmer, in the one year 1950.
(c) The tax rate for 1950-51 should beset at 1 3/4 per cent for all municipalities. This is slightly more than three times the rate obtained by dividing the present 500 per cent rate by 200 x 5 (see No. 1 above). For years the municipalities should be allowed to impose whatever rates they desire except that for a few years they might not be allowed to go beyond 3 per cent. The purpose of the uniform rate the first year is to gain information on the progress of revaluation and collection and their effect on the community. In the light of such information, it may prove advisable to set a ceiling rate other than the 3 per cent suggested above.
(d) The value set for this tax should in no case be less than the value arrived at under the national income tax in the revaluation of assets. (see Chapter 7).
Our recommendations for an increase in the land and house tax must be judged in the light of our recommendation that the real estate acquisition tax be abolished (see Chapter 13).
Under the reforms that we propose, the prefectures would lose some 7 billion yen in revenue, and we estimate that the municipalities would gain something in the neighborhood of 40 billion yen, obtaining nearly 50 billion yen from the tax in lieu of the present 7 billion yen (municipalities' share).
(e) The Local Finance Commission (Chapter 2) should continuously study the degree to which uniformity in valuation is being achieved, among municipalities.
[# the end of Chapter 12]