税制調査会－諮問・答申・報告書等

1. Taxation of Individual Income
1) Present Situation and Challenges of Individual Income Tax - Restoring role as main tax -
Japan's individual income taxation (national tax: income tax, local tax: individual inhabitant tax) underwent several times of tax reductions. As a result, Japan's tax burden levels (the ratio of tax revenue to the national income, ratio of individual tax burden, etc.) are so low (limited scope of taxpayers paying tax at low rate), compared to other major countries. Individual income taxation is on the verge of losing the revenue raising function and the income redistribution function that individual income taxation is expected to play as main tax. In the review of the current individual income tax system, the above-mentioned problems of ''hollowing out (shrinking tax base and revenue)'' must be corrected in order to restore the original functions as main tax. At the same time, distorted distribution of tax burden, if any, amid the structural changes of the socioeconomy, ie. falling birthrate, aging population, must be corrected. In addition, ''feelings of bearing unfair tax burden'' that exist persistently among people must be solved correctly.
In the process of instituting a desirable individual income tax system, discussing increase in tax burden is unavoidable. In this case, a step-by-step introduction is essential for taxpayers to bear slow increase in tax burden.
2) Directions of the Reform in the Future

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1) Basic Policy - Sharing burden fairly and broadly -

a. Exemptions and deductions
Examples that indicate ''hollowing out (shrinking tax base and revenue) of Japan's individual income taxation'' are found in the ratio of non-taxpayers to the total number of workers and relatively high lowest tax threshold (lowest taxable limit). Tax threshold is an accumulation of certain basic exemptions. The limit is the index to distinguish taxpayers from non-taxpayers and will affect the taxable income amount of all taxpayers. Beside the tax rate, taxable income is the most essential element affecting tax burden, revising exemptions is extremely important under the philosophy that ''sharing expenses of the society fairly and broadly.'' The following three points will be important standpoints in revising exemptions.

A	. A variety of exemptions for income tax and individual inhabitant tax have been introduced in response to changes of living conditions including marriage, nursery, and old age. It is true that considering the circumstance of individual taxpayers is an important character of income tax and individual inhabitant tax. However, since various kinds of living ''infrastructure'' including social security have been implemented to a quite satisfactory level, it is appropriate to simplify and consolidate income tax and individual inhabitant tax.
B	. Instituting a neutral tax system is also quite important in order to avoid distorted sharing of tax burden among taxpayers and interference of free choices made by individuals in the socioeconomy amid ongoing structural changes, including the expanding gender-equal society, changes in employment practice, falling birthrate and aging population.
C	. Along with increase in aging population, reduction of the taxation base will be accelerated due to deduction for pubic pension, etc. To correct the ''hollowing out'' in the taxation base, it will be necessary to revise exemptions in order to consolidate the taxation base.

b. Tax Rate Structure
    Due to its reductions and simplification of bracket structure, Japan's minimum and maximum tax rates are lower compared with those of major advanced nations. In addition, the scope of income amounts where minimum tax rate is applied (bracket) has been expanded. For example, approximately 80% of Japanese taxpayers (employment income earners in the private sector) pay their income tax at minimum tax rate (10%), which is exceptional among the major advanced nations. In other words, the present income tax system in Japan allows most taxpayers to pay income tax at a quite low tax rate. This has been brought about by repeated alleviations of progressive taxation (flattening of tax bracket structure).
    Progressive taxation is rather flat with individual inhabitant tax than income tax because the former asks burden according to the benefits that the taxpayer enjoy. Approximately 60% of taxpayers in Japan pay individual inhabitant tax at a minimum tax rate of 5%.
    The progressive taxation was relaxed in the comprehensive tax reforms legislated in 1987 and 1988 where the taxation base was expanded, by including capital gains of securities, etc. into the tax base, but the tax rates were generally lowered by considering giving incentives for work and business, and stimulating the economy.
    Further reduction of tax rates is inappropriate when the revenue raising function and income redistribution function of income taxation are taken into consideration. Rather, it will be an important option to cut back the bracket of the present minimum tax rate (see the appendix).
c. Permanent Tax Reduction
    So-called ''permanent tax reduction'' of income tax and individual inhabitant tax has been implemented since 1999. The size of the reduction amounts about ?4.1 trillion. Permanent tax reduction, especially the ''fixed rate tax reduction'' (about ?3.5 trillion), was given by paying utmost consideration to economic situation, and thus, it should be repealed while paying attention to economic conditions.

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2) Reviewing Exemptions and Deductions

a. Exemptions for the Family Members

. Streamlining and integrating of Personal Exemptions

) A variety of personal exemptions have been instituted in income tax and individual inhabitant tax by considering the family structure and other living conditions of individuals taxpayers. They are considered as reducing the ability to pay tax. These exemptions, however, should be revised from the standpoint mentioned in ''2(1)a exemption'' earlier and considering the following points:

. A variety of ''infrastructures'' including social security and education have been well arranged compared with those when exemption measures were introduced for the first time. Meanwhile, because living conditions of individuals are different, introducing exemptions to meet individual conditions is naturally limited. In addition, Japanese people are generally satisfied with plentiful living facilities around them, and their senses of value on conditions for exemptions are becoming diverse.

. Past repeated premiums and additional exemption measures have resulted in a greater exemption for members of the family rather than the exemption for the taxpayer oneself. The exemption system has also become too complicated.

) By implementing the following concrete measures for an appropriate tax system, exemptions should be simplified and consolidated into basic exemption, exemption for spouse, and exemption for dependent.

. Specific dependant exemption, exemption for aged dependent, and other additional exemptions, and special exemptions such as exemption for working student, for widow(er), and other special exemptions should be simplified including discontinuance as much as possible. However, exemption for the disabled, which needs real consideration, should be continued.

. A tax mechanism on special exemption for spouse has been introduced so that the exemption for the head of the household is reduced according to increase in the income of the spouse. This mechanism eliminates the unintentional decrease of the net income after-tax pay of the household, which is said the major cause of disincentive to work by part-time workers. However, the mechanism is based on exemption for spouse and special exemption for spouse, both of which are applied to the head of the household. Thus, the mechanism creates imbalance in exemptions for the head of the household and other dependent members of the family. In addition, this mechanism is pointed out as not neutral to social activities of men and women from the standpoint for the formation of gender-equal society. Based on the above-mentioned opinions and standpoints, it is advisable to discontinue special exemption for spouse. In this case, the above-mentioned unintentional decrease of net income after-tax pay needs to be addressed.

.  Further Revision of the Basic Structure on Personal Exemptions
    Further revision of the basic structure on personal exemptions, consisting of the three exemptions (basic exemption, exemption for spouse, and exemption for dependent), should be discussed and examined based on the following three typical different opinions for nationwide discussions.
    In this case, Opinion 2 or Opinion 3 supposes that exemption for spouse and exemption for dependent are discontinued while basic exemption is upgraded and expanded.

[Opinion 1: Personal exemption should consist of the following: basic exemption, exemption for spouse, and exemption for dependent.]:
	Opinion 1 pays consideration to the purpose of the current personal exemptions, namely consideration to diminishing tax-bearing capacity due to support to dependents. The variation of this is to consolidating the personnel exemptions into family exemption (tentative title) and basic exemption in exchange of indiscriminating spouse from other dependent family members. Further, from the standpoint for forming gender-equal society, some members of the Tax Commission are of the opinion that exemption for spouse itself be abolished.
[Opinion 2: Exemption for spouse should be abolished and exemption for dependent should be limited to children and aged family members only.]
	Opinion 2 is based on the idea that exemption, in principle, should consist of only basic exemption of taxpayers themselves. Since the adult is supposed to have a capacity to work and have income, no exemption for dependent for the adult should be applied. Meanwhile, children and aged family members are regarded as having scarce opportunities for work, they should be included in exemption for dependent. This opinion accompanies the problem that no consideration is paid to diminishing ability to pay tax of a taxpayer and that a taxpayer is supposed to pay a sharply increased tax when his or her dependent family member reaches maturity age and no exemption for dependent is applied to the taxpayer.
[Opinion 3: Exemption for spouse and exemption for dependent should be abolished while tax credit for supporting children should be instituted.]
	Opinion 3 adopts the idea that exemption should consist of basic exemption of the taxpayer alone while paying attention to supporting children in the form of tax credit. Unlike income exemption, this measure will allow the equal amount of tax benefit regardless of the amount of income of a taxpayer (however, the measure do not benefit non-taxpayers). As this opinion pays no consideration to diminishing tax-paying ability caused by the support of dependents, it is unfamiliar to the Japanese individual income tax system. In addition, since exemption and other income exemption are instituted in mixture, the system will be more complex.

b. Exemptions and Deductions for Elderly
    At present, various measures have been introduced to elderly people, including special additional exemptions for old-age person (provided that income of a elderly taxpayer is ?10 million or less) and deduction for public pension. Meanwhile, ''Revising the System of Specially Treating Aged Persons'' has come up as one of the subjects in the Broad Outline of Aged Society (Cabinet Decision of December 2001).
    Amid the falling birthrate and aging population, it is urgent to revise exemptions for middle-aged and elderly persons and to ensure fairness between elderly people and working people who support the social security system. According to an OECD study, Japan's ratio of tax amounts to social security benefits is extremely low. Thus, taxation at public pensions and benefits according to the capacity of aged persons will contribute to adjustment of actual benefit levels, resulting in fairness between generations as well as among aged people.
    Regardless of the fact that a taxpayer can deduct public pension premiums at full amount in the form of deduction for social insurance premium, deduction for public pension is given at the time of receiving pension benefits. In other words, public pensions are virtually exempt from taxation at the stage of both contribution and payment. In addition, both deduction for employment income and deduction for public pension income are applied to those who have employment income and public pension income.
    From the standpoints mentioned above, requirements for exemption for elderly should be revised so that the exemption is applied to the elderly truly in need of it. Deduction for public pension is, in principle, supposed unnecessary because deduction for social security premium is applied at the time of making contribution. Meanwhile, as a minimum, from the standpoint of promoting fairness among generations, the relationship between additional exemption and old-age pension should be reviewed so that these exemptions can be reduced substantially. Furthermore, the scope of deduction for social insurance premium must be reviewed because the pension system has been diversified and a number of contributions included in the scope are optional.
c. Deductions for Salary and Retirement Income
A. The total deduction for employment income or ?62.8 trillion accounted for some 30% of the gross employment income of ?222.8 trillion (FY 2002 budget basis) at macro level. The ratio is regarded as quite high and not legitimate as the standard deduction for expenses necessary for employment income earners. Most of the major advanced nations are adopting a fixed amount allowance as the standard deduction, or define the deduction limit. Compared with these deductions, Japan's deduction is high and has a problem of having no upper limit of deduction.
    The Tax Commission has regarded that the characteristics of deduction of employment income cover two elements, that is ''standard deduction of working expenses'' and ''special consideration for the situation of employees, and make adjustment to other types of income''. The number of employees accounted for some 80% of the working people in 2001. Increasing number of workers are selecting various types or work style. Under these circumstances, paying special consideration to conditions of employees is becoming less necessary.
    In conclusion, deduction for employment income should be reduced by seeking for a reasonable level of standard deduction for working expenses.
    Employees are of the view that business proprietors could manipulate their income to reduce tax burden by attributing income to their corporation and that their income is not monitored well. This view is leading to the feeling of bearing unfair tax burdens among employees. Thus, in reducing deduction for employment income, how to eliminate such feeling of inequity must also be taken into consideration.
    The deduction for specific expense has been instituted as the mechanism to allow deduction of certain types of actual expenses incurred directly and necessary for the working of the employee. However, applications of this system are very limited. When deduction levels for employment income are lowered, an increasing number of employed taxpayers are likely to choose the deduction for specific expense in the future. Although the scope of the Japanese deduction for specific expense is not narrow compared with the scope of major advanced nations, the scope needs a renewed examination to meet changes in socioeconomic conditions.
B. Payments of lump-sum retirement severance vary from corporation to corporation. Nevertheless, deduction for retirement income is calculated simply according to the number of years serving for the company. In addition, the calculation of retirement income is not necessarily reasonable. For example, tax is imposed on a half of employment income even if the number of years serving for the company is short. In particular, when the number of years serving for the company exceeds 20 years, deduction amount for retirement deduction increases to ?700,000 per year from ?400,000 according to the present retirement deduction system.
    Employment patterns and practices in Japan have been changing in recent years. Such changes include early retirement, job change, change in the method of paying retirement severance and payment in the form of larger salary with no retirement severance.
    From the standpoint of ensuring fair and neutral taxation, taxation at retirement severance should be revised by examining actual situations of working conditions and retirement severances.
d. Exemptions/Deductions as Special Taxation Measures
    Deductions for life insurance, non-life insurance, home loan, etc. have been instituted in order to fulfill particular policy objectives. On the other hand, however, they have distorted the tax system and create ''hollowing out'' (shrinking tax base and revenue) to some extent.
    Since it is intended to conduct review on fundamental items of income tax such as personal exemptions with a view to streamline and abolish from the viewpoints of expanding income tax base, exemptions and deductions given as special taxation measures should be examined more rigorously and reviewed with a view to abolish them.

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3) Individual Inhabitant Tax (local tax)

a. Basic Policy
    Individual inhabitant tax is characterized as having proper features that costs for the local community should be borne by as many local people as possible according to their capacity and that local taxpayers can clearly recognize the relation of burden-to-benefit for receiving social welfare and other man-to-man services that the local government provides for local people under the situation of the falling birthrate and aging population. Individual inhabitant tax is also regarded as hardly having partial taxation sources and therefore its tax revenue is stable. Thus, individual inhabitant tax should be upgraded and consolidated as main local tax.
b. Taxation on Income Basis
    Exemptions and tax threshold of local inhabitant tax should be set to a level lower than income tax since as many local taxpayers as possible should bear burden due to the recognition of the relation of burden-to-benefit in the tax
c. Taxation on per capita basis
    The per capita levy has been revised for several times so far. However, the tax rate of capitation still remains low when compared with changes in national income.
    Thus, the gap of per capita levy and their level should be reduced and revised according to brackets of population phase.
    The non-taxation measure on the wife of a co-living taxpayer should also be revised from the standpoint of individual-based taxation along with the development of gender-equal society.

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1) Present Situation and Challenges of Corporation tax - Revenue raising and vitalization of socioeconomy -
Repeated reductions of corporation tax and falls of corporate revenues in recent years have led to a drastic fall of corporation tax revenues. As a result, corporation tax revenue now accounts for a little more than 20% of national tax revenues. In addition, some 70% of corporations in Japan are operating at a deficit.
However, corporate activities are increasingly expected to expand worldwide. Under these circumstances and from the standpoint of vitalizing the socioeconomy, reforming corporation tax has come up as a challenging subject while ensuring the revenue raising function of corporation tax.

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2) Directions of the Reform in the Future

a. Basic policies - Instituting a less-distorted and neutral tax system and prioritize special taxation measures -
    The corporation tax system should be compatible with international standards as well as impartial and neutral for business activities in order to respect inventive activities of corporations so that corporation can maintain and strengthen their competitiveness.
    From these standpoints, the Japanese corporation tax system has undergone a number of reforms since FY 1998. For example, the corporation tax rate was reduced to the internationally compatible level while the taxation base was expanded. In addition, the consolidated tax payment system was introduced. These corporation tax reforms must be strengthened and maintained in order to vitalize the socioeconomy.
    Meanwhile, Japan's corporation tax rate (national) is at the same level of major advanced nations as a result of reductions of corporation tax rate. Further reduction of corporation tax rate by taking into account of the levels of corporation tax in developing countries is inappropriate.
    Instead, the level of Japanese corporation tax rate should be examined and revised by considering the level of entire tax burdens, the entire tax scheme and the balance of tax rates of other advanced nations.
    When taxation by the size of business is introduced into enterprise tax (local tax) on corporation, the effective tax rate on corporate income will be reduced.
    Meanwhile, existing special taxation measures must be consolidated and streamlined drastically in order to promote simplified taxation and expand the taxation base. At the same time, truly effective measures must be implemented in a targeted and prioritized fashion to reform and vitalize the socioeconomy. In line with these reforms, problems on corporation tax must be worked on in response to new moves in the socioeconomy, including emerging diverse business operations.
b. Targeting of Tax Incentives - Prioritize tax incentives based on a clear national strategy -
    In order to strengthen the competitiveness of Japanese corporations and reform the present industrial structure, Japan has to focus on important areas, including regulatory reform and expenditure cut, based on a clear national strategy in anticipation of industry and technology that will lead the 21st century. In the area of tax system, on the one hand, rationalize and streamline existing special tax measures, on the other hand, special tax measures must be targeted and prioritized in the truly effective areas such as R&D.
c. Reappointing new socioeconomy Trends
    Diverse investment forms have emerged along with globalization of economic activities and financial deregulation. In line with these moves, business forms and scales of corporation have changed. In society with a falling birthrate and aging population, non-profit making activities by NPO corporations are expected to play a greater role in building a vital socioeconomy.
    In response to these new moves, the following subjects should be worked on depending on the type of corporation (see the appendix):

A	. Taxation at retained earnings of family corporations, taxation of partnerships and other different business entities should be examined from the standpoint of ensuring appropriate taxation and promoting smooth activities of corporations.
B	. Taxation of non-profit making corporations should be examined comprehensively. Specifically, taxation at profit-earning business of corporations in public interest and reduced tax rate of corporations in public interest and associations/cooperatives should be examined by considering moves of reforms of corporations in public interest. In addition, taxation at NPO corporations, non-profit mutual benefit corporation and other new forms of corporations should be examined.
C	. Taxation of donation should be examined by taking into account of tax treatment adopted in other countries and the activities of non-profit making activities. Relations with various systems, including the certified NPO corporation system should be considered as well. Such examinations should be made so that NPO corporations can have smooth operations as new leaders for the public welfare.

2) Enterprise Tax (local tax) - Introduction of Taxation by the Size of Business -
The introduction of assessment of enterprise tax of corporations by the size of their business is an important reform for ensuring fair distribution of tax burden, clarifying the characteristics of tax as a benefit-based taxation, stabilizing main local tax that support decentralization, vitalizing the Japanese economy, and promoting economic structural reforms. The introduction of pro forma standard will come to correct ''hollowing out of taxation'' (shrinking tax base and revenue) - or the problem that some 70% of corporations bear no enterprise tax on corporation - and establish a corporation tax system where profit-earning corporations will be treated in a more appropriate way. Pro forma standard taxation of enterprise tax should be introduced at an early stage in order to promote true decentralization by clarifying the relationship between burden and benefit.