Chapter 13
OTHER LOCAL TAXES

A. The Enterprise Tax

The enterprise tax is an independent prefectural tax. This yield is shared with the municipalities, usually 50-50, through the device of a municipal surtax. The standard rate of tax is 7.5 per cent for the prefectures, and 7.5 per cent for the municipalities, a total rate of 15 per cent.

Agriculture, live-stock breeding, forestry, and fishing, however, are accorded a special rate of 10 per cent total, and income from staple foods is exempt.

The standard rates can be exceeded up to 18 per cent and 12 per cent with the approval of the Local Tax Deliberation Committee. Central approval of these 18 and 12 per cent rates has been granted by ordinance. The rates can go higher, if the Prime Minister does not object. Data on approved rates for 1948-49 fiscal year showed combined rates totaling 15 percent and 10 percent in 15 prefectures, 18 percent and 12 percent rates in 29 prefectures, and 22.5 percent and 18 percent in one prefecture.

The yield of the tax is estimated by the Local Autonomy Agency at 50 billion yen for the current year, 42 billion yen to come from the 15 percent rate and 8 billion yen from the special rate on farmers and fishermen. The 1948-49 yield has been estimated as high as 28 billion yen, but final figures on the amounts actually collected are not available at this time.

The profits on which the tax is levied are those of the preceding year. In principle -- but not always in practice, as explained below -- the taxable profits are those arrived at for purposes of the national income taxes. In principle, then, the enterprise tax is simply a surtax on the national tax. Unincorporated enterprises with income of less than 4,800 yen are exempt, but pay tax on the entire income if it exceeds 4,800 yen. The basic exemption of 15,000 yen and the dependency credits, used for the national personal income tax, are not permitted under the enterprise tax. This makes the enterprise tax a particularly heavy one for a small shopkeeper with a large family. Suppose a shopkeeper with four dependents has a profit of 150,000 yen. At 18 percent, he pays 27,000 yen in enterprise tax. The weight of this tax can be understood by computing what tax rate would have to applied to get that much revenue if the basic exemptions and dependency credit of the national tax were used. Subtracting 15,000 basic exemption allowing for the tax credit of 1,800 for each of four dependents would leave a tax base of only 135,000 yen, to which, in order to get 27,000 yen in tax, after deducting the 7,200 yen dependency credit, the government would have to apply the equivalent of a flat rate of over 25 percent. In this case, then, the enterprise tax of 18 percent is as heavy a burden as would be a national income tax rate of 25 percent.

The farmer is subject to a much smaller tax according to the law. Not only does have the benefit of the lower rate, but the tax does not apply to income obtained from the sale of staple foods produced under government quota.

All corporations that are exempt from the national income tax are exempt from the enterprise tax, except that profit making activities of charitable and similar corporations are taxable under the enterprise tax.

The local Tax Law gives practically all control over the administration of the enterprise tax to the prefectural Governor. In articles 7 and 8, for example, it is provided that:

(1) Where the enterprise has branches in other prefectures, the taxable income to be allocated to each branch will be determined by the Governor of the prefecture in which the main office is located who must then notify the Governors of the other prefectures of his decision. If the other Governors disagree with the allocation, they may appeal to the Prime Minister, whose decision is final.

(2) If the branches of the enterprise are all located in one prefecture, the Governor determines the allocation to each city, village or town in which the enterprise is located. The Mayor of each locality effected may file a protest, through the Governor, to the prime Minister.

(3) Determination of the taxable income of enterprises not covered in (1) and (2) above is also the responsibility of the Governor. All appeals by the enterprise taxpayer must be made to the Governor, except for enterprises operating in more than one prefecture, in which case appeal may be made to the Prime Minister.

Inasmuch as the legal base of the enterprise tax is the taxable income as defined for the national income tax, it might be supposed that the assessment of the enterprise tax would be a simple matter of taking the preceding year's national income tax returns as a basis for computing the tax. However, this procedure is apparently not followed in all cases.

For example:

(1) The Governor has, in some instances, appointed an Enterprise Income Examination Committee at the prefectural level composed of prefectural tax officials, representatives of the municipalities, industry and trade, and others. This committee determines "standard enterprises", that is, standard rates of profit for various types of enterprise.

(2) The governor then appoints similar committees for the cities, villages, and towns. These committees, using the standard enterprise as a guide, determine the taxable income of enterprises in their locality. This income is reported to the prefectural tax office, which then assesses the tax. Thus the taxpayer does not assess his own tax.

(3) In cases where there is some doubt, or where the taxpayer protests, the prefectural office will check with the national income tax reports.

In all prefectures where we inquired, the prefectural tax chiefs insisted that this method was to preferred to reliance on the national income tax returns because the income as stated on those returns "was at least 20 per cent too low".

Recommendations:

The enterprise tax is apparently designed not to be shifted to consumers. The fact that it is levied on net income indicates an intention that the business owner shall absorb the tax. Net income taxes are usually presumed to be non-shiftable.

The point of view is acceptable as long as the cumulative bur-dent of the whole tax system on the net income base is not too severe. But in Japan at the present time it has passed that level, especially with regard to the unincorporated enterprise. The individual proprietor of a shop or small factory must at the present time pay (1) a national tax on his net profits after personal exemption and credit for dependents; (2) a prefectural-municipal inhabitant's tax, part of which is commonly based on his net profits; and (3) the enterprise tax. Even proprietors with a modest income may find them selves subject to a combined marginal rate of nearly 70 per cent under these three taxes.

Moreover, there is evidence that the enterprise tax is frequently administered in a way that gives only a crude approximation to net income.

Some kind of prefectural tax on enterprises is justifiable, in order that the businesses and their patrons shall help defray the cost of government services that are made necessary by the existence of the business and its employees in that local area. For instance, public health expenses are multiplied when a factory and its employees come into a certain area.

We therefore recommend that the enterprise tax be retained but that it be transformed to accomplish two aims: first, to relative some of the cumulative pressure on net profits as a tax base; and second, to make the administration both more simple, and less dependent in principle upon what the national government's tax administrators do.

The best solution is to expand the base of the tax by applying the rate, not to profit, but to the sum of profit, interest, rents, and payroll. Another way to define this base is: total gross receipts minus all purchases from other firms, including purchase of capital equipment, land, and buildings. The balance is what the concern adds in value to the materials, etc., that it has purchased from other businesses. For example, a small manufacturer, in a certain year buys raw materials and supplies costing 500,000 yen, and machinery costing 100,000 yen. With the aid of his employees, whom he pays 300,000 yen he turns out a product that he sells for 1,000,000 yen. His concern has added 400,000 yen of value to the 600,000 yen of machinery, materials, etc. that he purchased from other concerns. This 400,000 consists of 300,000 wages and 100,000 profit; the 400,000 yen is the "value added".

For purposes of this tax, "profit" is given a very simple definition. In computing profit, no computation of depreciation needs to be made, since the full cost of machinery and plant is deducted in the year they are purchased by the concern. And no accounting for inventory is needed. The tax is therefore much simpler to compute than the pure net income on which the present enterprise tax is supposed to be levied.

Although this value-added tax is not based on net income, it is free of the distorting tendencies of the transactions tax; that is, the value-added tax does not encourage the growth of vertical integration. This point, already noted briefly in Chapter 10, Section A, can be explained by a hypothetical example. Suppose that a small raw materials producer sells raw materials for 100,000 yen to a small manufacturer. The manufacturer works the materials up into a finished product, which he sells to a small wholesaler for 500,000 yen. The wholesaler sells the goods to a small retailer for 600,000 yen, and the retailer sells them to the public for 1,000,000 yen. What happens under a transactions tax? The tax is imposed successively upon 100,000 yen, 500,000 yen, 600,000 yen, and 1,000,000 yen -- that is on a total of 2,200.000 yen. Suppose that these independent concerns are competing with a large concern that is vertically integrated, that is, which itself performs all of the functions of raw materials producing, manufacturing, wholesaling, and retailing. The large concern pays transactions tax only on 1,000,000 yen. It has a decided competitive advantage under the transactions tax. Under the value-added tax, however, the tax applies to the following amounts: raw materials producer, 100,000 yen; manufacturer, 400,000 yen (500,000-100,000); wholesaler, 100,000 yen (600,000-500,000); retailers, 400,000 yen (1,000,000-600,000). The total of these taxed amounts is 1,000,000. And the large vertically integrated concern also pays a value-added tax on 1,000,000, since its purchases from other firms are zero.

In comparison with the business tax on a pure net profits base, the value-added tax has the economic advantage that it does not discriminate against the use of capital, especially in the form of labor-saving machines. The net profits tax bears on value created in this manner, and not on value created by the use of direct labor. This is an important point in Japan at the present time, where modernization of plant and equipment is one of the more urgent needs.

Finally, when the combined weight of several taxes on business profits becomes as heavy as it now is under present Japanese tax laws, some part of the profits tax is likely to be shifted forward to consumers in higher prices. But the shifting will be more unequal and probably more inequitable than under a value-added tax.

We recommend that the enterprise tax, using value-added as a base, be administered entirely by the prefectures, which should obtain all the yield. The municipalities are being given the entire yield of the inhabitant's tax and the real estate tax (land and house tax) under our recommendations.

The rate of the value added tax should be set at a level that will yield the prefectures approximately 44 billion yen a year. Farmers should be exempt, owing to the large degree of control the national government exercises over their selling prices, and also because they are being asked to undergo a substantial increase in the land and house tax. The same increase applies to shopkeepers and manufacturers, but the impact will probably be somewhat more noticeable by the farmers, whose chief working asset is land. With farmers exempt, it is likely that an average rate of somewhere around 4 per cent to 6 per cent will be needed to assure the prefectures a yield of 44 billion yen. However, each prefecture should have considerable leeway as to the rate it may levy, so that the tax can be fitted to differing local conditions. We recommend that any prefecture be empowered to impose the revised enterprise tax at a rate not to exceed 8 per cent for the first two years of the life of the tax. At the end of that time the experience with the tax should be reviewed. It is our hope that the prefectures can by then safely be left to impose whatever rate they think best.

The enterprise tax should exempt business concerns that are too small to be worth the trouble of checking, provided they are not so large that exempting them would upset competitive relationships.

One technical note may be added here. In a few cases, a concern may spend so much money in one year for plant and equipment that its value added for that year, computed as suggested above, will be negative. In this case, the negative value-added should be carried forward to be offset against value-added amounts in succeeding years, thus reducing the tax otherwise due in those years.

We have not studied the activities of live-stock breeding, fishing, and forestry in Japan enough to form a definite opinion on their place under the new enterprise tax, but it seems that live-stock breeders might be treated like farmers, while fishermen who are little affected by the land tax, could afford to pay the enterprise tax. Forestry might be made subject to the enterprise tax and be given a reduced rate, or other special treatment, under the land tax.

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B. Admissions Tax

During the post-war period the admissions tax has been raised markedly. The rate was raised from 50 percent to 200 percent on April 1, 1945. It was lowered to 100 percent on March 31, 1947, and raised to 150 per cent December 1, 1947.

The tax was transferred from the national government to the local governments in August, 1948, one-third of the revenue going to the prefectures and tow-thirds to the municipalities. In the fiscal year 1948-49 the yield of the tax was 12 billion yen, and it is estimated to yield about 14 billion yen in 1949-50. This indicates a total consumer expenditure of 23 billion yen on tax-paid admissions during one year (compare the 158 billion yen expenditure on tobacco).

Japanese probably has the world's highest tax rate on admissions in general. So high a rate has two major disadvantages. It impairs the ability of the consumers to get what they prefer for a given outlay, since it interposes a high barrier between consumers' willingness to pay for something and the cost of producing it. Speaking generally, consumers are paying for much better moving pictures than they are getting, and the same is doubtless true of many stage performances. The second major disadvantage is evasion. A third disadvantage might be grossly unfair impairment of producers' profits and salaries paid to actors and others in the industry. This may be the case with regard to theatres outside the motion picture field, but the motion picture industry appears to be in at least fair condition financially. However, this third point need not be extensively debated here, for the first two are enough to justify a recommendation for a reduction in the rate to 100 percent at present, and to a lower level in future years when more theatres will have been built and competition will have expanded enough to make it unlikely that too much of the tax reduction would go merely to increase producers' profits and the salaries of stars. Theatre admissions are no longer under price control.

There is evidence that considerable evasion of the tax has been occurring. Some of the methods that are said to be used are as follows. Theatre employees are paid their salaries partly in cash and partly in passes and free tickets, which they are expected to sell without tax. Often such tickets are said to be sold right in front of the box office. A large number of free tickets and passes are being issued to shareholders of motion picture companies and theatres, in lieu of dividends. The shareholders frequently sell these tickets and passes. Some theatres have said to have their ticket-takers pick up the tickets and return them to the box office where they are resold. Evasion will doubtless be checked under present plans by which the local governments will print numbered tickets to be used by the theatres. Still, a 150 percent rate is almost sure to be an effective inducement to some evasion.

Under a lower rate, the admissions tax is the kind of tax that can be administered well by a local unit of government. But it is an unequal source of revenue for units as small as municipalities. The small towns and villages get nothing from it, and even lose indirectly, as their inhabitants go to the neighboring, larger municipality to see the movies and pay tax. We therefore recommend that the entire tax be transferred to the prefectures, to be administered solely by prefectural tax officials.

We recommend that all admissions be taxed at 100 per cent, except that no admissions tax at all should apply to those events that are under the "special admissions tax" regime: admissions to a stadium to view sports events by students, if the entire net proceeds of the event go to the school, and do not inure to the benefit of any individual. Exemption should also be granted to admissions to amateur dramatic, musical or other entertainment programs sponsored by schools, if the participants receive no remuneration and if the entire net proceeds go to the school, and do not inure to the benefit of any individual. We do not specifically recommend a similar exemption for events staged for the benefit of charities and religious groups because we are not informed as to the safeguards that would have to be devised (as in the definition of a charity, for instance) to prevent abuse of the exemption.

We suggest that the following measures be taken to check evasion. Doormen could be required to tear the ticket in half and hand one-half to the patron, and penalties should be provided for failure to do so. The theatre owner could be required to pay the tax at the time of purchasing the tickets from the government. There could be frequent checks of theatres by tax officials to ascertain whether tax-paid tickets only are being used.

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C. Other Minor Local Taxes

1. Real Estate Acquisition Taxes

A tax of 20 per cent is imposed o the acquisition of real estate, both land and structures. For small houses, not exceeding 15 tsubos, or 540 square feet of floor space, the tax is 10 per cent.

A heavy transfer tax on real estate is likely to prevent it from being put to its best economic use, when the conditions that guided its initial construction or acquisition have ceased to govern. By simply blocking many transfers, the tax causes a decline both in the revenue of the Treasury and the economic adaptability of the community. And it is so heavy a capital charge with respect to the erection of structures that it hinders building more than would an equivalent tax collected in small installments over a number of years.

We are recommending a substantial increase in the present land and house tax (Chapter 12). This kind of tax gives the localities a more stable revenue than a tax on construction and transfer.

In view of all these factors, we recommend repeal of the real estate acquisition tax. This tax is currently shared equally between the prefectures and the municipalities. Its total yield for 1949-50 is estimated at 12 billion yen.

2. Amusement, Eating and Drinking Taxes

The rate of this tax varies between 20 per cent and 150 per cent, depending on the category of eating or drinking or similar entertainment, and is divided equally between the prefectures and the localities. It is expected to yield 12 billion yen in 1949-50, chiefly because of the there-opening of restaurants.

We recommend that the tax be retained, but that all the revenue go to the prefectures. Like the admissions ax, this levy is more suitable for prefectural use in view of the substantial differences in amount of tax base among municipalities.

3. Liquor Consumption Tax

This is a 5 per cent tax on the retail sale of liquor. It is expected to yield 4 billion yen in 1949-50, half to the prefectures and half to the municipalities.

Liquor and tobacco are more efficiently taxed, on the whole, at the national level. We therefore recommend that taxation be concentrated at that level. It should be possible for the national government to increase its revenue from the liquor tax substantially (Chapter 9, Section B).

We recommend that the liquor consumption tax be repealed.

4. Miscellaneous Taxes Recommended for Retention

We recommend that the localities continue to be permitted to impose the following taxes for local revenues, unchanged, or essentially so. The yield figures are estimates for the current year, in millions of yen.

We also suggest that, unless there are substantial reasons to the contrary, each of these taxes be levied solely by one or the other level of government (some by the prefectures, others by the municipalities), instead of being split between the two levels (see Chapter 2).

5. Miscellaneous Taxes Recommended for Reduction pr Repeal

We recommend that the localities not be allowed to continue their taxes on vessels (200 million yen to prefectures and 200 million yen to municipalities), on telephone (500 million yen to prefectures and 500 million yen to municipalities), on the acquisition of boats (300 million to municipalities), and on safes (100 million yen to municipalities). None of the objects noted above seem especially well suited be singled out for taxation.

We recommend that the special net income tax be repealed and that the persons and occupations taxed under it be subject to the provisions of the enterprise tax, as revised.

In addition, we recommend that the taxes on the acquisition of bicycles and carts be repealed. This would lose the municipalities about 500 million yen. But the annual taxes on the possession of bicycles and carts could well be continued; they provide about 1 billion yen a year for municipalities.

While our computations indicate that reliance upon non-legalized sources of revenue should be lessened in the future, we recognize that variations in conditions from one locality to another may necessitate their use in specific instances. We recommend that appropriate provisions authorizing such taxes, be continued.

We recommend that special purpose taxes levied as an addition to land taxes, house taxes, enterprise taxes and special net income taxes, be repealed.

6. Contributions

In every municipality the members of our mission visited on our field trips, we encountered evidence of substantial amounts of money being raised for municipal purposes by means of the so-called voluntary contributions. To a certain degree, this method of financing is traditional to Japan, but the degree to which it is being used at present appears to be far from traditional. The urgent necessity for school buildings to carry out the new educational program has stimulated many municipalities to raise money for this purpose by contributions of substantial size. The degree to which contributions are being obtained reflects also the restrictions necessarily imposed on local finance in the course of the stabilization program.

It is our impression, from discussion with municipal officials and taxpayers, that these contributions are a source of difficulty and unfairness, and that amount so taken may be expected to decline sharply if the municipalities are given more adequate regular sources of revenue, as we propose. Sometimes the contributions are imposed on much the same basis as the inhabitant's tax, but often it is a question of an approximate ranking of all the local citizenry on the basis of a number of factors, some of them subjective. Our estimate of 40 billion yen being collected this year from this source (Chapter 3) is no more than a repetition of a guess that comes to us from informed quarters, but from isolated data we gave gathered on our field trips, this total does not seem improbable. Most of it, apparently, accrues to the municipalities. To some extent also, some of the major occasions for contributions, such as the construction of schools and police quarters, are not expected to recur to the same extent in the future.

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