MW-94 -- Taxes on Sinners and Saints

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J@pan Inc Magazine Presents:
M O N E Y W A T C H
Weekly Financial Commentary from Tokyo
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Issue No. 94
Tuesday, October 5, 2004
Tokyo

CONTENTS

@@ VIEWPOINT: Taxes on Sinners and Saints

========= Entrepreneur Association of Tokyo - October Seminar =========

This month's EA-Tokyo seminar introduces Naota Hamaguchi, President and
CEO of JCI Inc, an international consulting firm assisting non-Japanese
companies in conducting business with Japanese companies and assisting
Japanese companies in expanding their businesses overseas.
His presentation is entitled, "How to succeed as an entrepreneur in Japan."
For more information please visit the EA-Tokyo website.

Date/Time: Tuesday, Oct. 5th at 7:00 pm City Club of Tokyo - Maple Room
(Canadian Embassy Complex)
Language: English http://www.ea-tokyo.com Email: info@ea-tokyo.com
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@@ VIEWPOINT: Taxes on Sinners and Saints

Prime Minister Koizumi's new cabinet was a mixture of promise --in its
single-minded focus on reform of the post office -- but a disappointment
in that its focus is so narrow and gives little attention to the broader
challenges that face Japan like those discussed in last week's article.

One area other than the post office in which we can expect some action in
the near future is in one of our areas of focus at Moneywatch --
taxation. The government is clearly aware of the poor state of its
finances after a decade of massive spending attempting to resuscitate the
economy, and the fiscal demands it is going to face in the future. So what
can it do to increase tax revenues without bringing an end to the fragile
recovery?

The talk so far has all been about hiking the consumption tax rate to
somewhere between 10 and 15%. This is something that will have to happen at
some time, but its high visibility to consumers has the potential to do a
lot of damage to their confidence and therefore to the economy as a whole --
just recall the impact of the move to 5% in April 1997.

The other area that has been discussed is rolling back the "temporary" cuts
to individual income tax in 1999. Rolling back these cuts is worth as much as
3 trillion yen -- about 7% of total revenues from all taxes. In our opinion,
this is the area where the government can and should move further to raise
revenues. While the highest marginal rate of individual tax is, at 50%, still
high by international standards, the effective rates of tax for average income
earners is extraordinarily low: a household earning 10 million yen per annum from a
single breadwinner, more than 50% higher than the average household earnings, will
pay less than 10% in income taxes (although there is another 10% payable in social
insurances).

Although your correspondent is generally opposed to social policy
through taxation, I have to concede the other area that cries out for an
increase is taxation on tobacco sales. There was a slight increase in the
tax rate earlier this year and there is no indication yet of that having
any negative impact on sales. Given that total revenues from tobacco are
currently only around 2 trillion yen per annum, and Japan is increasingly
viewed as an international haven for users of tobacco, there must be scope
for a significant increase in rates before there is a (desirable) reduction
in consumption.

The challenge I see for the government in all of this is to balance
the fiscal demands with the need for simplification and eradication of
certain other taxes. Corporate tax rates are too high and are a great
disincentive to investment and entrepreneurial activity; anachronistic rules,
like those regarding payments directors, need to be abolished and the government
needs to move forward with implementation of tax pass thru limited liability
companies and partnerships. Despite some welcome changes in recent years,
the taxes on the transfer of real property are still too high, as well as
excessively complex (see a catalog of these taxes in Chapter six of the 2003
Real Estate Securitization Handbook published by TP Publishing: http://www.transpacific.jp/publishing/index.html) and continue to act as a
drag on the recovery of this sector.

So is Koizumi's new cabinet up to these challenges? I'm optimistic
that we will see improvements in the tax system, as it is legislated,
before the end of Koizumi's term in 2006. But that unfortunately won't
do much for the other side of the equation: the inefficient and heavy-handed
administration of the tax code by the national tax administration about which you've
already seen so much in these pages.

-- John Charles-Decourcy

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STAFF
Written by John Charles-Decourcy (jcd@japaninc.com)

Edited by J@pan Inc staff (editors@japaninc.com)

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