A SUSTAINABLE TAX SYSTEM FOR JAPAN’S AGING SOCIETY (June 2003)

June 2003
A SUSTAINABLE TAX SYSTEM FOR JAPAN’S AGING SOCIETY
The Tax Commission

TABLE OF CONTENTS

Introduction
I. Aging Population and Declining Birthrate and the Tax System
	1	. Tax system that supports the aging society with declining birthrate
	2	. Reform of Individual Tax Items
		1	. Individual income tax
		２	．Consumption tax
		3	. Corporation tax
		4	. Inheritance tax and gift tax
		5	. Excise taxes
II. Decentralization and the Tax System
	(1)	Basic concept
	(2)	Direction of future measures
III. Other Issues
	(1)	Financial and securities taxation
	(2)	Development of Tax Payment Environment
		1	. Taxpayer Identification Number
		2	. Public Announcement System (large income taxpayers) and Information Reporting and Matching System
	(3)	Measures for Environmental Problems
	(4)	International Taxation
	(5)	Non-performing Loan Disposal and the Tax System
Supplement
	Measures for Environmental Problems
	Tax-System Response for Non-Performing Loan Disposal

* Informal translation of the Mid-term report of the Tax Commission: Syoushi-Koureisyakai Ni Okeru Zeisei no Arikata (Tax Commission). For accuracy and nuances, see Japanese original.

Introduction

Amid the aging of the population and declining birthrate and the rapid advances in globalization, promoting structural reform is an urgent task for achieving an invigoration of the Japanese economy and society. It is also necessary to rebuild the tax system so that it will fit the new society of the 21st century. Based on these issues, the Tax Commission published “Policy Guidance on the Establishment of a Desirable Tax System” (“Policy Guidance”) in June of last year, which presented an overall picture of the desirable form of the Japanese tax system in order to achieve a sustainable invigoration of the Japanese economy and society from a medium to long-term perspective. Based on this overall picture, the FY2003 tax reform achieved the reform of a wide range of tax items such as abolition of the “special allowance for spouse” (exceeding the amount of the　“allowance for spouse”) as the first step toward simplifying and streamlining personal deductions, enhancement of R&D tax credit and investment incentives, reform aimed at raising the reliability and transparency of the Consumption Tax, introduction of measures to integrate inheritance and gift taxes, introduction of taxation on corporations by the size of their businesses, and review of taxation on financial assets and securities and on land.

In January of this year, the commission received instructions from Prime Minister Koizumi to further enhance considerations regarding issues such as building a tax system that supports the aging of the society from among the ideas presented in “Policy Guidance,” based on the results of the FY2003 tax reform.

Japan is in a phase of major transformation of its social and economic structure, such as the fact that the population will soon start to decrease in line with the aging of the society and declining birthrate. In order to restore the confidence of the people of Japan, who will shape its bright development in the 21st century, it is necessary to promote structural reform in a wide range of fields and build a vigorous private sector along with an efficient and sustainable public sector that supports it. Meanwhile, due to the increasing importance of the stock economy in line with the aging and maturing of the Japanese economy and society, the efficient use of assets such as financial assets is important for maintaining the vigor of the economy and society.

On the other hand, regarding public finances, only about half of Japan’s annual expenditure is covered by tax revenue. Japan’s finances are in a state of crisis, with the national and local governments being　liable　for large amounts of outstanding long-term government bonds. It is of vital importance to achieve a primary balance at the earliest possible time in the 2010s with the aim of securing sustainable finances. To this end, it is necessary to make efforts to steadily improve the fiscal balance. Pension, healthcare and nursing payments are expected to increase in line with the progress of the aging of the society in the future, and an increase in the burden on the people is unavoidable. In order to gain the people’s understanding about future increases in burden, aiming to improve the efficiency of the public sector by full-fledged administrative and fiscal reform carried out by the national and local governments is a major prerequisite.

Furthermore, as an important pillar of Japan’s structural reform, it is necessary to strive to strengthen local governments’ rights to self-determination and self-responsibility, and to promote decentralization.

The tax system must also be reformed in a manner consistent with such structural reforms.
Based on such awareness and in accordance with the instructions of the prime minister, the Tax Commission proceeded with deliberations that focused on issues such as “the aging population and declining birthrate and the tax system,” “decentralization and the tax system,” and “financial and securities taxation.” In the course of the deliberations, the commission sent missions to study related trends in North America and the　Nordic countries from late April to early May.

This report further expands on the contents of “Policy Guidance,” and makes proposals regarding a desirable tax system for Japan from both the medium and long-term perspectives. It is hoped that, based on these proposals, constructive discussions will take place among the public toward the rebuilding of the tax system in the future.