Proposal So Unpopular, Even Own Party Tries to Distance Itself From Prime Minister : Nakasone’s Plan for Value-Added Sales Tax Creates an Uproar in Japan

Prime Minister Yasuhiro Nakasone once observed that the Japanese style of consensus politics “can slow down decision-making until the final decisions come too late. Our times demand leadership with a clear vision and firm decisions.”

Nakasone expressed this view in a booklet on his political career shortly before taking office in November, 1982. Now he is trying to put it into practice. So far, the results have been disastrous and there is sure to be more trouble. But in the end he is expected to succeed.

Since his government submitted a bill that would impose a 5% value-added sales tax, Nakasone’s popular support has plummeted. Last October, when he won a year’s extension of his term, his popularity stood at more than 60%. Today, according to one poll, it stands at 24%.

The neo-Buddhist Komeito (Clean Government Party) announced March 12 that it had gathered more than 20 million signatures on petitions opposing the sales tax. Two days later, the newspaper Asahi reported the results of its poll on the tax: 82% were against it.

In a by-election on March 8 in Iwate prefecture, which has long been a stronghold of Nakasone’s Liberal Democrats, the Socialists won by a margin of more than two to one.

In Parliament, opposition parties have snarled debate to the point that action on the fiscal 1987 budget is nearly two months behind schedule.

Politicians such as former Prime Minister Takeo Fukuda are making comparisons with 1960, when Prime Minister Nobusuke Kishi’s Parliament ratified a security treaty with the United States while the opposition was boycotting Parliament. As a result, Kishi was forced to resign.

Foreign Minister Tadashi Kuranari has called off a trip to the United States and Defense Director Yuko Kurihara has called off a trip to China because of the parliamentary uproar. Opposition to Nakasone’s plan to visit the United States in April also has arisen.

Also in the balance is Japan’s promise, made at a meeting of finance chiefs in Paris on Feb. 22, to devise a policy to spur domestic growth in exchange for help from other advanced nations in maintaining stable foreign exchange rates.

Usually rock-solid sources of funds for Nakasone’s party--retailers, wholesalers, chambers of commerce, textile manufacturers--have cut off donations. The controversy got so acrimonious that Shintaro Abe, chairman of the party’s General Affairs Committee, warned the country’s four largest business organizations that “if you tread on a tiger’s tale, you may have cause for grave regrets.”

Liberal Democratic candidates in local elections next month have told Nakasone to stay out of their districts during the campaign, which officially begins Monday.

So many Liberal Democratic members of local government assemblies have spoken out against the proposed tax that Noboru Takeshita, the party secretary general, has sent out instructions on seven separate occasions ordering local party organizations to halt the rebellion. Yet by mid-March party leaders had abandoned even the pretense of trying to maintain discipline.

Deficit Spending Cut

Not that Nakasone and the party failed to try to win a consensus on the tax. Ever since Prime Minister Masayoshi Ohira tried unsuccessfully to enact a general consumption tax in 1979, the government has tried to show taxpayers that it will go as far as it can to reduce budget deficits before asking for new taxes. With only a few exceptions, spending increases have been slashed to the point that the fiscal 1987 budget calls for a minuscule increase of 0.2%.

In 1979, almost 35% of the budget was financed with government bonds but in the proposal for fiscal 1987, deficit spending has been slashed to less than 20%.

Belt-tightening has gone so far that the Reagan Administration is now criticizing Japan for maintaining a deflationary policy when, according to Washington, it should be stimulating the economy to attract more imports and reduce Japan’s massive trade surplus.

Nakasone tried to sweeten the pill of the value-added tax, which will replace and enlarge existing excise taxes, by lowering personal and corporate income taxes. But broken promises and hundreds of unanswered questions have wiped out whatever hope might have existed for consensus.

In general-election campaigning last July, a campaign that resulted in the Liberal Democrats’ biggest victory ever, Nakasone declared that he would not ask for any “large-scale consumer tax in a multi-stage, universal, all-inclusive, comprehensive, top-to-bottom and left-to-right form that scoops up everything, like in a net.”

These “many adjectives,” Foreign Minister Kuranari told reporters later, probably made Nakasone’s promise too difficult for voters to understand.

Nakasone, who took office promising to “make politics easy to understand,” refuses to admit that he has broken his promise. He now says that his proposed sales tax is a “medium-scale tax,” not a “large-scale tax.”

But Akira Ichihara, chairman of the Japan Department Store Assn. and president of Mitsukoshi Department Stores, commented that if Nakasone’s sales tax is not a large-scale tax, “then a white horse is not a horse.”

There is a consensus that the government obtains too much of its revenue from direct taxes (73.8%). It is the complications and details of the new, indirect tax that have stirred up the hornets’ nest.

Prominent in the minds of wholesalers and retailers is the fact that the tax will, for the first time, give the Finance Ministry a yardstick by which to measure their real income, thus making tax evasion difficult. Nakasone recognized this by promising to order tax officials to refrain from investigating payments of the sales tax for three years after it goes into effect.

There is also widespread opposition to a proposal that would replace exemptions on interest from savings with a flat 20% tax. Until now, every Japanese has been able to save up to 9 million yen ($60,000) without paying tax on the interest.

The reforms, at least initially, are to be “revenue neutral,” with cuts and increases balancing out at $30 billion.

Local and national income tax reductions of $18 billion a year for individuals and $12 billion a year for corporations are scheduled to go into effect April 1. The new 20% tax on savings is to take effect Oct. 1, boosting government revenue by $10.7 billion a year, while the sales tax is to become effective Jan. 1, bringing in another $19.3 billion a year.

Will Encourage Exports

American officials have carefully avoided making any comment on the subject, but the effect of the tax package on trade is expected to be mixed.

Products that Japan ships overseas will be exempt from the sales tax, thus encouraging exports. Import prices will rise, in effect boosting tariffs that have just been lowered to an average of 2.1% back up to more than 7%.

The overall impact of higher prices for imports as well as for domestically produced goods will tend to reduce consumption, economists fear. On the other hand, the reform will reduce incentives for savings and spur a streamlining of the complex distribution system. U.S. officials have been urging both moves for years.

So much of the reform proposal remains to be spelled out that no one can predict objectively what its effect actually will be. Government agencies reportedly will have to issue 127 ordinances to specify the details after the tax bills are passed.

Although 51 categories of transactions have been earmarked for exemption from the tax, standards for the exemptions have not been made clear. The few examples that have been made public point to a Pandora’s box of contradictions.

Japanese will be able to come into the world without paying tax but will not be able to leave it untaxed. Medical care, including births, will be exempt, but funerals will not be.

Patrons of the Kabuki theater will not pay the tax, but people who go to theaters of other kinds, including movie houses, will pay it.

Predicts Small Increase

Food will not be taxed, but transportation and the containers in which food is sold will be. Opposition politicians have charged that food prices, as a result, could increase by 2% or 3%, or more.

Nakasone has said that taxable items will cover only 35% of the consumer products used by the average household. According to Finance Minister Kiichi Miyazawa, overall consumer prices will rise by only 1.6%.

The most trouble has been caused by a provision that will exempt all businesses with less than $666,667 in sales from paying the sales tax. The Liberal Democrats fixed the exemption to reduce expected opposition from most of the nation’s 6.13 million enterprises. With the exemption, only 790,000 of them will have to pay the tax.

Accountants, however, have discovered that retail prices will rise more steeply if a tax-exempt wholesaler handles a product than if all firms from manufacturer to retailer pay a value-added share of the tax. A tax-exempt wholesaler cannot pass on refunds of taxes paid at previous stages.

As a result, retailers are expected to avoid dealing with wholesalers that do not pay the tax.

Pressed in Parliament, Finance Ministry officials admitted that they expect as many as 500,000 tax-exempt wholesalers to volunteer to pay the tax.

Nakasone has insisted that nearly all households will pay less in net taxes. Finance Minister Miyazawa has said that local and national income taxes for a family of four with an annual income of $20,000 will be reduced by 36.3%.

“The average salaried worker will go through only two tax brackets (15% and 20%) from the time he goes to work until he retires,” the finance minister said.

But the respected newspaper Nihon Keizei (Japan Journal of Commerce) calculated that only households with an income of $40,000 or more--about 50% above the average--will pay less in net taxes.

The reform package also fails to correct inequities that taxpayers have been citing for years. Favored treatment will remain in effect for doctors, for income from the commercial activities of religious organizations and for capital gains from stock transactions. And, as at present, employed workers, from whose paychecks taxes are deducted, will bear the brunt of income tax payments. Farmers and shopkeepers pay taxes on the basis of returns that they file, and these are seldom checked.

Should Calm Down

Nonetheless, enactment of the reform package appears to be assured, although amendments, including a postponement of the effective date of the sales tax, also appear certain.

The rebellion in the ruling party is expected to calm down after the local elections of next month.

Furthermore, Nakasone appears to be determined to push the reforms through. Already he has compared himself to Prime Minister Kishi, who revised the security treaty in 1960 at the cost of being forced to resign. Kishi, he said, was a leader who should now be remembered for a tenacity that helped Japan “become prosperous through good relations with the United States.”

Losing the opportunity to enact the tax package in the waning days of a prime minister’s term, and at a time when the ruling party controls nearly 60% of the seats in the lower house of Parliament, could destroy the only chance that Japan has to lay the foundation for an eventual increase in taxes needed to restore balance to government budgets and pay for increasing welfare costs for Japan’s aging population. For no one regards raising direct taxes as even a remote possibility.

“If we lose this chance,” Miyazawa said, “there won’t be another in this century.”

Also, tax reform is thought to be ensured by the fact that none of the aspirants to succeed Nakasone wants to deal with the issue. They all want Nakasone to dispose of the controversy before he steps down no later than next Oct. 30.