Under the headline “Tax Reform, Direction Unknown” an article published on the 17th of November 2010 in Japan’s Nikkei Keizai Shimbun reported on difficulties that had entered into the process for setting tax policy in 2011. The Nikkei noted that this was an opportunity to show real political leadership.
The article explained how the tax reform decision making process between the Social Democratic Government (SDP) and the rest of the SDP had become increasingly confused. With the accession to power of the SDP, the only body intended to have the authority to take tax policy decisions was the Government’s Tax Commission (in Japanese the ‘政府税制調査会’ or ‘seifu zeisei chousa kai’– part of the Cabinet Office). This approach reflected a desire to replace the system under the former Japanese Liberal Democratic Party (‘LDP’) under which the LDP Tax Committee had significant authority over making decisions on tax reform, weakening the LDP Government’s authority to set tax policy.
However, during discussion about provisional tax rates relating to gasoline taxes in the previous year, there was considerable debate between the Government and SDP itself, with the end result that the pretense that the Tax Commission was responsible for tax policy being severely undermined. The conclusion of such debate last year was the presentation by Ichiro Ozawa of a party document identifying important tax reform requirements based on which, in substance, the issue was decided.
In this, the second year of the Tax Commission Prime Minister Kan has re-constituted the SDP tax reform planning committee (the ‘党政策調査会’ or ‘tou seisaku chousa kai’) which together with an ‘SDP ‘Tax Reform Project Team’, is contributing to the debate on tax policy reform. However, the Nikkei reported that third parties were having difficulties telling where the line had been drawn between the Tax Committee and the Project Team in relation to their decision making power.
The Project Team has delayed its report on a number of important items, such as the making permanent of the naphtha tax exemption, where a decision has been put off until the end of the current month. Also due at the end of November, plans for environmental taxes have not yet been decided within the party. The Project Team is gathering opinions, but the original plan under which their advice would support the Government Tax Committee’s planning has already been thrown into confusion.
The Nikkei reported that, on the other hand, items tending to increase taxes that would, if this was still the LDP generation, have involved great debate with the party had been tabled. For example, proposals included limitations on tax deductions for adult dependents and spouses, abandonment of the securities tax preference system and similar. The existing proposals of the Tax Commission had many points that the Finance Ministry had aimed for in the past but have not been able to realize.
The Nikkei noted that the background to this policy making confusion was the poor results of the SDP in this summer’s upper house elections. This defeat made it very difficult to discuss increases in the consumption tax rate as part of the preservation of the tax base. Proposals to preserve the tax base now tended to focus on increases in taxes for those with relatively large income or assets.
The Nikkei reported that to some extent dissatisfaction with the attitude of the Tax Committee had now appeared within the SDP. The newspaper also noted that if such dissatisfaction increased there may be more confusion with respect to the status of the Tax Commission as the sole determinant of tax policy.
One wonders whether the Nikkei is being sarcastic when it points out that the determination of tax policy in the current environment of conflicting opinion and fiscal crisis requires political leadership, given that in Japan it is highly improbable that any such leadership will be shown.
Key points of 2011 tax policy need to be determined by the end of the current year, which leaves little time for resolution of a number of outstanding issues. One of the key planks of the SDP growth strategy is the lowering of corporate tax rates, where the original plan to preserve the overall fiscal position would have probably involved raising consumption tax.
However, following their poor result, in the summer election the SDP see such a raise as politically very difficult. Hence the current conflicting opinion about different means to secure the overall tax take if corporate taxes are lowered.
The following few weeks will likely see an increasing number of articles on 2011 tax reform as these matters are decided. At present, though, it is very difficult to predict what direction 2011 tax reform will finally take.