Japan’s Ruling Party Revives Tax Plan, Lowers Rate

The Japanese ruling party, reviving a controversial proposal that has failed before, unveiled Tuesday a major tax reform package that would introduce a 3% tax on virtually all items in exchange for cutting personal, corporate and inheritance taxes by nearly $45 billion.

Prime Minister Noboru Takeshita, who has made tax reform the key mission of his government, said the proposal is designed to alleviate “the taxpayers’ feeling of unfairness and heavy burden.”

Spokesmen for three of the four major opposition parties said they would boycott any attempt in a special session of Parliament to implement the new value-added consumption tax, which would go into effect April 1.

Sadanori Yamanaka, chairman of the ruling Liberal Democratic Party’s tax committee, said the proposal is the most sweeping reform since those carried out under the U.S. occupation after World War II.

“Failure to implement the new tax is impermissible,” he said. “To ensure its enactment, I decided to set the rate at 3%.”

A bid last year by former Prime Minister Yasuhiro Nakasone to enact a 5% value-added tax was scrapped in the face of opposition by small shopkeepers. The Nakasone package, widely criticized as inequitable, was opposed by all opposition parties and precipitated a revolt in the ruling Liberal Democratic Party.

Nakasone’s proposal also drew criticism from the United States, which charged that a tax on consumption would dampen consumer spending at a time when Japan should be trying to promote domestic demand to reduce its massive trade surpluses.

The tax reform issue arose in the 1979 election, when the late Prime Minister Masayoshi Ohira argued that higher taxes, perhaps including a new consumer tax, should be included in measures to cut the deficit and reduce the use of bonds to finance the budget.

This time, the Takeshita proposal not only holds the proposed tax to 3% to make it more palatable, but also keeps exemptions to a minimum, allows shopkeepers to pay the consumption tax based on a self-declaration of sales, rather than by presenting sales receipts, and offers bigger offsetting income tax cuts to both individuals and corporations than Nakasone’s plan did. The new tax cuts would total 5.6 trillion yen, or $44.8 billion.

Although Takeshita’s Cabinet still must approve the proposal and enact legislation to enforce it, the main outlines are expected to remain unchanged.

Small shopkeepers with sales of less than 30 million yen ($240,000) a year would be exempted from the tax. They constitute about 70% of all business firms in Japan but handle only 3% of the sales.

Critics contend that the formulas for tax payment are designed to continue the tolerance of tax evasion by wholesalers and retailers, thereby avoiding major opposition.

U.S. officials here said privately that the large tax cuts in the new package ensure that the reforms would not undermine domestic demand.

For the average Japanese family of four with an income of 5 million yen ($40,000), the reforms would cut national and local income taxes by $560 but add $296 through the consumption tax, for a tax reduction of $264, Finance Ministry officials said. For a family of four with an upper-class income of 10 million yen ($80,000), the savings would amount to $1,632.

Economists and officials stress that Japan must impose a new, indirect tax to create a larger tax base in preparation for the rapid aging of its society and an inevitable increase in social security costs. Currently, 73% of tax revenue comes through direct taxation, a burden that experts say has reached the limit of taxpayers’ political tolerance.

Under the new proposal, no tax would be imposed on goods produced for export or on financial or land transactions.

Income taxes would be simplified, with five brackets and rates ranging from 10% to 50%. The top rate now is 70%. A family of four with income of less than $25,584 would be exempt from taxation.

The corporate tax rate, now 42%, would be reduced to 37.5% by fiscal 1990.

Capital gains would be taxed for the first time. Stock sellers would pay a flat 20% on their profits.

The consumption tax also would replace excise taxes, a reform that is expected to be a major help to the auto industry, among others.

Finance Ministry officials, who had wanted a 5% consumption tax, complained that a 3% rate would result in a $12-billion shortfall in revenue in fiscal 1990, the year in which the government has pledged to stop issuing bonds to cover operating expenses.