[ Nippon Keidanren ] [ Policy ]
(Provisional Translation)

Interim Report on the Integrated Reform of Expenditures and Revenues

Building a Streamlined and Well-muscled Government

April 18, 2006
Nippon Keidanren

Executive Summary


Japan's fiscal conditions have deteriorated to a state not found among developed countries: the total long-term debt outstanding of the central and local governments is more than 150 percent of the nation's gross domestic product (GDP). If the nation fails to address the situation, interest payments and debt service costs will put pressure on other government spending, making it impossible for Japan to employ flexible policy management and to maintain the social security and other welfare systems for the Japanese people. Moreover, if domestic and international markets doubt the sustainability of Japan's fiscal administration, it may bring inestimable loss to the Japanese economy due to the steeprising of interest rates, the substantial depreciation of the yen, and inflation.

The government and ruling parties, including the Council on Economic and Fiscal Policy, are now conducting studies related to the Integrated Reform of Expenditures and Revenues. In light of upcoming changes in the nation's economic and social structure and the current economy which is regaining signs of hope, this is the last good opportunity for Japan to achieve full-scale reform. We believe it is our responsibility to future generations to take this opportunity to resolutely work toward reform.

The Integrated Reform of Expenditures and Revenues will have a major impact on people's lives and on the nation's economic structure so discussions regarding directions for reform must be based on the actual issues that the country faces, the ideal form that Japan's economy and society should take, and the roles that government should play to realize this.

In June 2006, the Council on Economic and Fiscal Policy is to present options and a roadmap for the reform. Thus, as representative of the business community, Nippon Keidanren decided to draft this report on the challenges Japan faces in achieving reform and its basic views.

1. International and Domestic Environments Surrounding Japan

Internationally, Japan faces heightening global competition while domestically the nation confronts the advent of a society that has a dwindling population.

World markets are becoming increasingly borderless, and people, goods, money, and information are traversing national borders at an unprecedented speed and scale. As a result, corporations are exposed to increasingly fierce competition both domestically and internationally. Moreover, competition among nations is heightening as countries aim to achieve economic development for themselves by attracting corporations and outstanding human resources through the expansion of their markets via market integration and economic partnership agreements and the improvement of their business infrastructure, including their tax system, accounting standards, and financial and capital markets. Japan must also succeed in this global competition.

Domestically, Japan is being called to transform its economic and social framework in light of the nation's population increase. In 2005, the population of Japan declined for the first time ever, and this trend will not change for the time being. The decrease in the working-age population (ages 15 to 64) accompanying the aging of the nation will accelerate further, and the population is predicted to decline by around 1 million a year in the mid-2010s. Japan must build a sustainable economic and social framework even though the population will continue to dwindle over the next 20 to 30 years at least. This will require that we apply information and communication technologies (ICT) to best advantage and that we build a social infrastructure where women and the elderly as well as foreign people can demonstrate their capabilities more than before.

2. Vision for Japan's Economy and Society

For Japan, a nation poor in natural resources, to ensure that its people can enjoy secure lives amid these international and domestic pressures, our country must create a dynamic economy and society in which a manufacturing industry producing high value-added products and a service industry offering high-quality services that support the manufacturing industry collaborate together and enhance each other's productivity. Continuous R&D and technological innovation are key to overcoming the various challenges Japan faces. Without these, Japan can hardly dare hope for a bright future. To make it conducive for corporations and individuals to demonstrate their capabilities and create value in our nation, it is important that Japan develop transparent rules and a safety framework to respond to situations that corporations or individuals cannot handle through their own efforts.

3. The Future Form and Role of Government

The role of government will become increasingly important in maintaining the dynamism of Japan's society and economy and creating a society in which people can live securely.

On the international front, the Japanese government should think about the proper path forward for the nation and actively and strategically advance its foreign diplomacy and security policy, including trade negotiations and economic partnerships, from the perspective of heightening Japan's presence in international society.

On the domestic front, Japan must efficiently and flexibly reform its economic and social framework with an eye to emphasizing the functioning of markets more than in the past. So that Japanese and foreign corporations and individuals can demonstrate their dynamism in Japan, the government should further promote deregulation, opening up to the private sector concerning government-controlled markets, and the improvement of tax and other system infrastructure. In addition, from the perspective of increasing Japan's economic potential from the supply side, the government should take further initiative than ever and play an active role in (a) promoting science and technology in order that Japan becomes a nation based on the creativity of science and technology, (b) reforming the corporate tax for capital accumulation, and (c) developing and securing talented human resources. Strategically promoting this kind of infrastructure improvement for economic growth is one of the key roles that the central and local governments should play in the future.

At the same time, the central and local governments must maintain a society where the people can live securely by developing a sustainable social security system and other frameworks. Keeping in mind that this security is founded by stable economic growth, the government must undertake drastic review of the social security system.

For the government to fulfill its roles of realizing a dynamic economy and ensuring the security of the Japanese people, it is more important than before that the central and local governments are strategic and flexible in their performance. Therefore, creating bloated organizations and operations and increasing expenditures will not only inhibit the effective utilization of resources, but also raise the potential national burden rate and chip away greatly at the nation's economic vitality. This will result in the further expansion of the burden pushed off on future generations.

From the above perspectives, Japan should work toward building a "Streamlined and well-muscled government" and promote swiftly the Integrated Reform of Expenditures and Revenues.

4. Prompt Implementation of the Integrated Reform of Expenditures and Revenues

Currently, the government aims to "achieve a surplus in the primary balance of the central and local government combined in the early 2010s," but this is simply a milestone on the path toward the realization of a "Streamlined and well-muscled government." The long-term debt outstanding of the central and local government combined approaches 780 trillion yen, and public confidence in the sustainability of public finances might be lost depending on future interest rate movements.

Setting the prompt achievement of a surplus in the primary balance as a partway mark, Japan should establish clear goals and a progress schedule toward the reform of expenditures and revenues after that and steadily work to shrink the government debt. Speedy implementation of reform is crucial to minimize the burden on the people and hold down the potential national burden rate. To gain the people's support of reform, every possible means should be employed to reform the expenditures side, first more than everything else. While monitoring the progress achieved in that area, the government must examine as quickly as possible drastic reform of the tax system to achieve stable revenues.

Through these kinds of government efforts involving both the central and the local governments as well as the self-help efforts, creativity, and ingenuity of the private sector, Japan must create reliable and dynamic economy and security that attracts all the people in and outside of Japan.

The remainder of this report outlines our views on the basic challenges that Japan faces in reforming such areas as government administration, public finances, social security, and tax.

Issues for the Integrated Reform of Expenditures and Revenues

5. Improvement of the Simplicity and Efficiency of Government Administration

To emerge successfully in the heightening global competition among nations in the future, Japan must promptly establish an administrative system that can respond adeptly and flexibly to issues, such as the demand for infrastructure improvement to strengthen the nation's international competitiveness and demonstrate economic vitality.

In the new era, government administration must promote thorough streamlining and perform focused investment of policy resources in the core roles of government by redefining the functions that government should fulfill and implementing "selection and concentration" based on the promotion of economic revitalization as well as fiscal soundness and efficiency. While advocating the early enactment of the Administrative Reform Promotion Bill, Japan must build a promotion framework utilizing to maximum advantage the private sector's knowledge and implement the PDCA cycle to ensure that the reform is effective. Moreover, from the perspective of ensuring continuous administrative reform, Japan should enact a "basic law" on administrative reform.

Local governments should clarify the relationship between benefits and burdens and efficiently provide local administrative services to residents. They should focus on revitalizing the local economy by attracting companies and developing human resources.

Regarding infrastructure development and other wide-area administrative issues that require cooperation among neighboring local governments, municipal mergers should be evaluated, giving full attention to ensure that duplication does not arise between the administrations. The division of roles between the central government including local agencies and the municipalities, the Government should consider the countermeasures for the multi-tiered structure of administrations keeping in mind the introduction of the do-shu system.

(1) Further Promotion of Regulatory Reform and Opening up to the Private Sector

From the perspective of emphasizing market functions, Japan is strongly called to further advance regulatory reform and to push forward the transition from ex ante regulations to administrative review ex post facto. We must concentrate our investigations into issues that have piled up to date, including the ideal form of the system, and promote reform.

Opening up to the private sector concerning government-controlled markets will lead not only to the review of both the prices and quality of the services themselves, but also to the reform of special public corporations and independent administrative institutions. We should work for the early enactment of the Public Services Efficiency Bill (so-called Market Testing Bill) and designate a wide range of services for market testing, giving due consideration to proposals from the private sector.

It is anticipated that the private sector, including public interest corporations and nonprofit organizations, will play leading roles in the future in areas where the public sector traditionally has operated, and the government must enhance the environment to support this.

(2) Reform of the Public Servant System

To create a trim and efficient public sector, Japan should build a comprehensive employee evaluation system and a suitable compensation system by reforming the public servant system of both the central and local governments. Japan should also allow personnel placements to be performed across government ministries and offices by eliminating sectionalism while taking care to ensure that specialization is secured. For the capabilities of public servants to be utilized fully, we must enhance the mobility of human resources throughout the central and local governments and the private sector. The practice of early retirement is a harmful effect of a compartmentalized administration. Toward the rectification of this problem, the government is called to build a highly transparent and integrated reemployment management system. An integrated management system that covers everything from the hiring of executives by the Cabinet to personnel and reemployment should be created, and personnel-related departments and agencies that are divided up among the sections of the government should be merged or abolished. The system should then be consolidated under the Cabinet. Regarding public servants at local governments, it is important that we promote more flexibility in the allocation criteria for teachers, police officers, and firefighters who together make up the majority of employees.

From the perspective of placing the public and private sector on an equal footing, we should examine the status of public servants. Like the retirement benefit system, the occupational addition (portion covered by the contribution of employer) in the mutual aid pension for public servants, for example, should also be changed so that it is on a par with private corporations. Treatment that is notably superior to that offered by the private sector in the region should be abolished.

(3) Continuous Review of Independent Administrative Institutions

Review of independent administrative institutions should not be postponed until the completion of the medium-term goals period but should be conducted continuously, including review of the nature of the institutions as well as the reduction or discontinuation of clerical tasks or programs and the implementation of market testing. In addition, Japan should vigorously promote the change of status of the personnel of specified independent administrative institutions to non-civil servant status.

(4) Follow-up through Policy Evaluation and Information Disclosure

The Ministry of Internal Affairs and Communications, the Ministry of Finance, and the Board of Audit of Japan must work together to make policy evaluation more effective.

Regarding the central government's financial statement, improvements are being made in the general account, the special accounts, the consolidated statements, and others. In the future, the government will have to develop ways to link the financial statement to policy evaluation, including sorting the budget and account items so that they are organized by policy. The government also must further accelerate account settlement and make expenditures more efficient through the PDCA cycle. Moreover, we should immediately undertake the international harmonization of Japan's governmental accounting to enhance domestic and international confidence in the nation.

(5) Raising of Administrative Efficiency through the Effective Use of ICT

Through the effective application of ICT, Japan should promote the restructuring of administrative organizations and operations and enable comprehensive and efficient administrative services. At present, existing operational processes have simply been computerized. This cannot be said to have led to the full transformation possible through the effective use of ICT, including the improvement of operational efficiency, the reduction of personnel numbers, and the lessening of the burden on the private sector. Under the IT Strategic Headquarters and the Cabinet Secretariat, the government should promote the digitalization of all operations in principle, the abolishment of unnecessary operations, the combination and standardization of other operations, and the outsourcing of operations to the private sector.

Building a comprehensive site (portal site), including local governments which interface frequently with the private sector, is particularly important. With the aim of making it possible for users to complete various administrative procedures and e-payments with one click, the government should endeavor to design systems that span various administrative agencies.

6. Securing the Sustainability of Public Finances and Prioritized Distribution

Japan's government debt on a fiscal 2006 budget basis rose to 150.8 percent of GDP, and there is no knowing whether our nation will be able to maintain the confidence of people in Japan and overseas regarding the future sustainability of the nation's public finances. The primary balance must be restored and the size of government debt decreased as soon as possible. Two factors placing pressure on public finances are social security related expenditures and local allocation tax grants. It is urgent that we reform the social security system and enhance local government fiscal discipline.

To achieve this, it is important that we raise the efficiency of administration and thoroughly reform expenditures at both the central and local governments. Moreover, it is key that we invest policy resources strategically and intensively to promote the growth of the economy which is the source of government revenues.

(1) Improvement of Total Expenditure Management and Discipline in Local Public Finances

The general expenditures of local governments make up over 60 percent of the combined total for both the central and local government, and 33 trillion yen in public finances are transferred from the central government to the local governments every year. To promote the further trimming of local government expenditures and achieve the Integrated Reform of Expenditures and Revenues, the government must set overall reduction targets for total local government expenditures and control expenditures based on them. The government must steadily promote expenditure cuts without allowing any sacred cows, such as social security related expenses, public works spending, and public servant personnel costs. Moreover, we must radically reform the local allocation tax system and local government public finance plans and promote the independence of the regions by strengthening discipline in local public finances.

The basic premises for the enhancement of the fiscal discipline of local governments are the clarification of the relationship between the benefits and burdens of the local government services and the provision of those services selected by the residents as meeting the original needs of the area.

The Ministry of Internal Affairs and Communications discloses information on the public finances of local governments on an integrated basis. In addition to this, calculation of standard administrative costs, comparing of the costs of the different local governments based on that data, and acceleration settlements, they would likely stimulate an awareness of costs and encourage administrative oversight by residents and enhance the rating of local government bonds.

The current local allocation tax system is structured to make up for local governments with the funds they lack so it is difficult to secure discipline in local public finances because there is no framework to promote cuts in local government expenditures. To encourage local governments in their efforts to reduce their expenditures, the government should use the unit costs of the local government with the lowest costs to formulate the projects that are guaranteed funds in the fiscal plans of local governments and reflect the amount of cost reduction in those local finance plans. Moreover, we must make it possible for the local governments to streamline costs using their creativity and innovation through deregulation required by the central government.

Japan must introduce a drastic reform of the local allocation tax system in the future. The system should be substantially downsized and restructured so that it does not supply the shortfall in revenues but adjusts the maldistribution of revenue sources. We should clarify this as a direction for reform and contribute to the rebirth of attractive regional areas by promoting further local government efforts to increase tax revenues and thoroughly reduce expenditures through revitalization of their regional economy. Moreover, local consumption tax offers a comparatively even distribution of tax sources. Upgrading this tax will make it possible to further reduce the role played by the local allocation tax in the adjustment of public finances.

(2) Reform of Special Accounts and Government Assets

Regarding special accounts, reform is being promoted with an eye to enhancing the soundness of public finances, and we must steadily move forward with this. In addition, we must next look at all special accounts and strengthen accountability to citizens and taxpayers from the perspective of the balance between benefits and burdens. Japan must further promote the review of clerical tasks and programs, the changeover in status of the implementation agencies to independent administrative institutions, the rationalization of costs, the reduction of unused and surplus funds, and the passing on of the benefits to citizens.

Moreover, the government should further promote the unified management, sale, lending and securitization of central government assets based on the principle of encouraging the effective use of government assets by the private sector. We should also perform an integrated review of assets held by local governments. We should set criteria and promote the effective use of local government assets and their sale and lending to the private sector.

(3) Prioritized Distribution with an Eye to Demonstrating Private Sector Dynamism

If the economy, which is the backbone of public finances, does not continue to enjoy steady growth, government debt will rise as a percentage of GDP even if we curb the public finance deficit in terms of flow through the rationalization of expenditures. From the perspective of promoting economic growth, the advancement of science and technology and the development and securing of human resources are key policy issues, and the roles to be played by public finance are many.

From the perspective of securing a workforce, it is particularly urgent that we build an infrastructure for accepting foreigners and a social infrastructure where the elderly and women can demonstrate their full capabilities in economic and social activities. In this sense, we should take focused measures in the tax system and others to support childrearing based on verification of the effectiveness of policies taken to date.

Moreover, it is important to promote infrastructure development in a focused and concentrated way to rationalize distribution system.

Of course, we should rationalize as much as possible unnecessary expenditures in priority fields as well. It is necessary to distribute resources strategically and intensively while using policy evaluation.

7. Establishment of a Sustainable Social Security System

Only if risks that individuals cannot handle by themselves are covered by society, individuals can take on bold challenges and fully demonstrate their capabilities. To secure the confidence of the people in the social security system, it is crucial that we strive for a balance between the benefits and burdens, rectify the intergenerational unfairness, and not pass on the burden to future generations.

Taking into full consideration the future decrease in the workforce and the tight fiscal situation, we have no choice but to review the range and level of benefits with an eye to narrowing the scope to those that truly must be ensured, in order to control the public burden and guarantee the functioning of the social security system in the future.

To create a system that is easy for the people to understand and support based on the system benefits and burdens, it would be desirable to have the burden not depend on age or employment status but on economic ability as much as possible. To ensure efficient system operation and guarantee that each citizen can see the balance between the benefits and burdens, basic pension numbers could be used as social security numbers, and an integrated system could be built using the same ID numbers for social security and tax. Individual social security accounts could be introduced that list the benefits and burdens for each individual over their lifetime.

To date, reform has been implemented in the individual systems within social security, but social security related expenditures still make up over 40 percent of the general expenditures of the central government.

The upcoming Integrated Reform of Expenditures and Revenues is likely to include options for limiting benefits over the medium to long term, but great intergenerational and intra-generational unfairness persists in benefits and burdens in social security, and waste and inefficiencies remain in the benefits themselves as well. Under these circumstances, social security expenses cannot be permitted to drift higher.

To make the social security system sustainable over the future, we must further trim benefits before the advent of a full-fledged aging society. For example, we should set the target of limiting overall social security benefit expenditures to less than economic growth by the beginning of the 2010s. We must not postpone radical reform of the system, but implement it without fail. To do this, we should initiate a national debate and identify scheme for examining the integrated reform of tax and social security and reach a conclusion within fiscal 2006, as stated in Basic Policies for Economic and Fiscal Management and Structural Reform 2003.

(1) Pension System

With the fiscal 2004 revision of the public pension system, a macroeconomic slide was introduced in the calculation of pension benefits. This can be viewed as having put some brakes on the burden placed on the working generation. The resolution of many other issues was put off, however. Under the revision, 50 percent, which is the income replacement rate for the model household at the time of the new legislation, is to be maintained as the minimum for benefits and the nominal minimum is to be maintained in the macroeconomic slide as well. If the decrease in the workforce accelerates in the future, however, there is a chance the macroeconomic slide will not function adequately. To the extent that it does not operate, it is possible that it will result in an increase in the burden on the working generation.

First, we must remember the original function of pensions -- namely, to supplement income after retirement -- and narrow down benefits overall, including reviewing benefits for high-income earners and eliminating the nominal minimum in the macroeconomic slide. Final premium for Employee Pensions must be limited to 15 percent. From the perspective of responding to this reduction in public benefits and promoting self-help efforts by individuals and corporations, we should abolish special corporation tax and increase the cap for defined contribution pension plans.

Moreover, to enhance confidence in the system, we should consider integrating the collection of taxes and social insurance premiums.

(2) Medical Care System

With the recent medical system reforms, the central and prefectural governments are to formulate 5-year plans to ensure appropriate medical treatment expenses. With an eye to limiting total public health insurance benefit expenses for fiscal 2010 to 30 trillion yen, further measures must be taken to promote appropriate expense levels, including implementing the PDCA cycle every year. For this reason as well, it is indispensable that we eliminate duplication in tests and medication, establish a system for evaluating the outcomes of medical institutions, and ensure that patients select appropriate medical services through information sharing among patients, medical institutions, and insurers based on the accumulation, analysis, and disclosure of medical data. It is also crucial that we enhance the functions performed by insurers by implementing preventive programs through the analysis of receipt data. We can anticipate achieving dramatic results by using ICT in this area. We should also strive to make the remuneration for medical treatment received by medical institutions from health insurance societies more appropriate and comprehensive regardless of whether the services are provided on an inpatient or outpatient basis. In addition to these measures, it is crucial that we examine a deductible system and place priority on public medical insurance benefits to secure the sustainability of the system.

To increase the fiscal discipline of insurers, we must create a system that clearly indicates the relationship between benefits and burdens for each insurer. Japan recently decided to establish a medical system for those aged 75 or above. Premiums from the elderly make up a low percentage of the benefits expenses, making it difficult to secure fiscal discipline for the insurers and the insured. Moreover, the target age bracket is 75 years of age or more so benefit expenses for those in the 65-to-74 age group will depend on financial adjustment between the insurers. Financial support from the working generation will account for most of the premium revenues in fiscal 2015 so this can hardly be called a sustainable system.

To put the brakes on the climb in medical care expenses for the elderly, it is crucial that we take measures to raise the efficiency of the above medical care expenses. Moreover, from the perspective of having the elderly carry an appropriate burden, further review of premiums and the self-pay burden is needed.

(3) Nursing Care Insurance System

The fiscal 2005 revisions can be praised for having nursing care facility residents cover their own meal and residential expenses and for establishing new preventive service benefits. However, thinking of the finances of nursing care insurance, we must further advance the prioritizing of benefits for nursing care services which contribute to the recovery of users' lifestyle functions and abilities and the improvement of their mental and physical state. From the perspective of raising the self-pay burden of high-income earners, improving the method for determining the level of need of nursing care, and encouraging people to shift from at-facility services to at-home services, we should consider allowing the self-pay burden to vary depending on the individual's situation. Japan should not lower the age to pay premium of nursing care for the elderly because there is little support from young generations due to the little relationship between benefits and burdens. First, we should endeavor to make nursing care benefit expenses more appropriate.

(4) Labor Insurance System

In light of the improved mobility in the labor market and the enhancement of job placement and HR development services by the private sector, the three employment insurance programs supported by employment insurance premiums (services for employment stabilization, services for developing human resources, and services for employees' welfare) should be radically revised, including abolition of services, because the relationship between the benefits and burdens is not clear. Japan should consider implementing any services deemed necessary using funds from the general account. Moreover, in the workman compensation account within the Special Account for Labor Insurance, premiums are allocated to labor welfare servicesAwhich need to be revised themselves. The government should implement a radical review of labor welfare services and lower premiums.

8. Drastic Reform of the Taxation

Assuming the basic premise that the public sector is streamlined and expenditures are cut as described above, radical tax reform is needed in response to the globalization of the Japanese economy and a society with a shrinking population. For this, it is crucial that we adopt not only the perspective of securing stable tax sources but also the perspective of increasing tax revenues by not obstructing but rather expanding economic activities which form the base of tax revenues.

(1) Review of Corporate Taxation with an Eye to Strengthening International Competitiveness

The effective tax rate on corporations in Japan is about 40 percent, but this is higher compared to those of key European countries and our Asian neighbors, as various nations have taken the bold step of further lowering their tax rate. In the United States, the federal corporation tax rate is 35 percent, and there are even reports that the real burden of the federal corporation tax will be lowered to between 20 to 25 percent through various frameworks.#1 Many countries have identified the lowering of the effective tax rate on corporations as a key way to emerge victorious in the global competition among nations. Through this, they are seeking to secure the competitiveness of their domestic corporations and to expand inward direct investment. Expanding economic activities brings about the increase of capital investment and job opportunities and, as a result, strengthens the base of all tax revenues. Japan also should take the step of lowering the effective tax rate on corporations as part of its growth strategy.

From the perspective of ensuring an equal footing internationally, we must support capital investment by reviewing the depreciation system and eliminating fixed property tax for depreciable assets. This will strengthen the international competitiveness of industry which will continue to support Japan in the future. We can expect that this, combined with the lowering of the effective tax rate on corporations, will promote asset accumulation and fortify growth potential. The following issues have been raised regarding the depreciation system: the capital sum recoverable through depreciation should be raised to 100 percent of the acquisition cost; the period of useful life should be shortened so it compares favorably with that of other countries; and the depreciation system should be made more flexible, including the merger of categories, so that it can address the economic situation and the individual situations of corporations.

There is no doubt that R&D and technological innovation hold the key to Japan's future economic growth. With an eye on the future, we should conduct studies regarding improving tax measures to promote R&D investment by corporations and the HR development necessary for that.

As companies develop global operations, the government should conduct studies that take into consideration the state of international taxation.

#1  Shigeki Morinobu (President of the Japanese Ministry of Finance's Policy Research Institute),
"U.S. Corporate Tax Shelter Issues and the Implications for Japan," International Tax Studies 15.

(2) Administrative Services in the Regions and Local Taxes

The basic role of local government is the provision of services desired by and financed by residents, and it is important that the relationship between the benefits and burdens is easy to understand. Personal income taxation and fixed property tax on residential property are considered the key taxes that support local government. To prevent fluctuations in the economy and uneven distribution of tax revenues from having an impact on local government finances, Japan must upgrade local consumption tax and use it as a tax source in the regions, based on the premise that local government administration is made more efficient and expenditures are thoroughly reviewed. In the regions, corporations pay substantial charges in addition to corporate income taxation. Such charges should be phased out by such means as consolidating corporate income tax on the central government. Moreover, it would be desirable for the level of corporate tax to be decided as a part of the strategy for the competition among nations. Moreover, caution should be exercised in the excessive or discretionary taxation of corporations, which do not have the right to vote.

(3) Challenges of Personal Income Tax

Japan must review the personal income tax from the perspective of ensuring that individuals can demonstrate their dynamism and that the tax burden is fair. Income tax should be designated as a key tax of the central government, and it must play some role in the redistribution of income. In this, however, it is important that it should not diminish the individual's dynamism or desire to work.

Moreover, because the public burden, including social insurance premiums, is rising, it is more important than in the past that people feel the system is fair. While retaining the efficient aspects of the current system, Japan should create an integrated system using the same ID numbers for social security and tax.

From the perspective of simplifying tax, eliminating double taxation, and promoting aggregation of profit and loss, Japan should consolidate the taxation of financial income while keeping practical issues fully in mind. From the perspective of rectifying the unfairness between the generations and creating equal opportunity, Japan is called to review the inheritance tax as well.

(4) Role of Consumption Tax

Japan must endeavor to streamline the public sector as described above even while a rise in social-security related expenses accompanying aging is inevitable. From the perspective of economic dynamism and international competitiveness, there is a limit to how much we can depend on an increase in tax revenues through direct tax on corporations and individuals. In the future, therefore, Japan will have to emphasize the consumption tax which can be borne appropriately by the full range of generations. The government should raise the consumption tax rate to 10 percent in phased manner as soon as possible while monitoring the economic situation and public expenditure reform.


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