Panel Urges Tax Cut in Japan to Boost Spending

A government tax commission recommended Tuesday that Japan adopt two tax reforms that the United States has been urging: a $30-billion slash in direct taxes and abolition of tax exemptions designed to promote savings.

Starting with a plea from Secretary of State George P. Shultz in April, 1985, U.S. officials have repeatedly asked the Japanese government to take the actions, with the aim of encouraging more domestic spending as a means to reduce Japan’s burgeoning trade surpluses.

Last year, spending by the average wage earner’s family in Japan increased only 0.1%. The median savings of a household amounted to $27,500.

The recommendations, which will be subject to approval by the ruling Liberal Democratic Party and then the Cabinet and Parliament, were submitted to Prime Minister Yasuhiro Nakasone by Takeichi Okura, chairman of the tax commission that Nakasone named more than a year ago.

Okura described them as designed to wipe out “distortions and inequities” in response to “rising popular dissatisfaction against taxes.”

‘Revenue Neutral’

Although the commission’s proposals were “revenue neutral”--new indirect taxes would be imposed to offset the reductions--reforms in personal income taxes promise to benefit nearly all wage earners, who now bear the brunt of taxation in Japan.

The most revolutionary of the proposals would fix only two rates of taxation--10% or 15%--for salaried employes earning up to 9 million yen ($56,250) a year. It would mean that 90% of employed workers would graduate into a higher tax bracket only once during their entire careers, the Finance Ministry said.

Overall, the present 15 tiers of progressive taxation rates on personal income would be reduced to six, while lowering the maximum taxation rate to 50% from 70%. Four of the brackets would apply only to non-salaried individuals and to salaried workers earning more than 9 million yen.

The commission also proposed to eliminate exemptions on interest earned from savings deposits of up to 9 million yen by any individual; but if that individual is a wage earner, the ceiling is set higher, at 14.5 million yen ($90,625).

The proposal would still offer preferential treatment to rich Japanese, however, by taxing all interest at a single rate, yet to be determined, separately from earned income.

Although the commission’s proposals for cutting taxes stirred little comment, its recommendations for raising taxes, including the abolition of exemptions, drew strong protest from the ruling Liberal Democratic Party and opposition parties.

The Postal and Telecommunication Ministry, which holds $625 billion in postal savings accounts, also spoke against abolition of the exemptions.

$1.6 Trillion Exempted

Last year, interest on more than $1.6 trillion worth of savings, about half of Japan’s total savings, was exempted from taxes.

To finance the tax cuts, the commission gave Nakasone three options for a new system of indirect taxes, ranging from taxation of goods as they leave factories to a value-added tax--taxing goods and services at each stage of the wholesaling and retailing system.

It also proposed that a capital gains tax on the sale of stock be phased in. Only people engaged in heavy stock trading are now subject to capital gains taxes.

A tax committee of the ruling party is scheduled to make its own recommendations by December, based on the commission’s report. Many of the reforms are expected to be implemented in next year’s budget, with others phased in over two or three years.

Finance Ministry officials estimated that elimination of the exemptions would raise tax revenue by about $5 billion and that the new indirect taxes, at a rate of 5%, would bring in an extra $25 billion.

Under the commission’s recommendations, personal income taxes at the national and local level would be reduced by $16.9 billion. Corporate income taxes would be cut by $11.2 billion and inheritance taxes by $1.9 billion.