Japan now faces the major economic difficulties. Responding to this, Prime Minister Ryutaro Hashimoto announced a new comprehensive economic stimulus package including increased tax cuts on April 9, in addition to emergency economic measures launched four times since last October by GOP and the ruling parties. We expect that these measures recover the shrunk confidence of Japanese citizens and thereby contribute to economic upsurge. If the Japanese economy were to slip further into recession, it would have a negative impact upon the stable economic development of Asian nations and harmonious economic relations with the developed countries.
The world is heading into an age of fierce competition, and Japanese demographics are veering toward smaller families and an aged population. To bring the ailing Japanese economy out of its continuing doldrums and give it new life, the government and ruling parties must adopt the following five structural reform measures as soon as possible.
To revive the economy, drastic tax reforms must be adopted to achieve a permanent reduction of ¥7 trillion in personal and corporate income taxes. To spur greater individual and corporate economic activity, it is important that tax reforms be accelerated as much as possible.
To achieve this purpose, central and local governments must first carry out thorough administrative and fiscal reforms to reduce fiscal expenditures. Furthermore, under the condition that further tax reforms should be accomplished to review the ratio of direct and indirect taxes to meet the target within the time frame of the law of financial structural reform, it is necessary to issue deficit-financing bonds in order to implement a tax reduction for preceding several years.
The 1998 economic stimulus package adds ¥2 trillion of special tax cut to a previously implemented special tax cut. This measure increases the level of threshold to exempt personal income taxation and would do little to spur economic recovery. For this reason, the FY1999 tax cut must be permanent in place of a one-time special tax cut. The tax rate for the highest income brackets is 65% including inhabitant local tax in Japan, which is much higher than in any other countries and We request that this rate be lowered to at least 50%, and the progressive tax rate structure be moderated in each tax bracket.
If personal income tax reforms were implemented in the manner described in the appendix, the total funds required for this tax cut is estimated about ¥4 trillion.
The effective rate of combined national and local corporate income taxes should be reduced to the 40% level, which is about the international norm, in a clarified schedule as soon as possible. The enterprise tax on corporations, for example, could be cut by 7%, and the corporate income tax could be reduced by 2.5%. The government should also eliminate special corporate income taxes on qualified pension funds, establish a consolidated tax payment system, and eliminate double taxation of dividends. These reforms would result in a total tax cut of ¥3 trillion.
Together with the implementation of permanent tax reductions, a taxpayer ID system should also be introduced to make the tax system fair and transparent. The government effort to grasp any income sources and avoid tax evasion would be remarkably improved by adopting this system.
Tax incentives should be enlarged to promote home ownership. The following five measures would be effective to achieve this purpose:
In order to obtain an early resolution to the problem of bad debts, it is important to increase the mobilization of land. Expediting passage of the Special Purpose Company (SPC) Bill now proposed in the Diet and provision of related legislation including creation of private servicers should also be secured with all due haste.
In addition, local governments should be encouraged to take strong concrete action as soon as possible to relax restrictions on floor area ratios.
As a first step to promote urban development, more kinds of facilities should be made eligible to receive loans from the Japan Development Bank, and limits on the percentage of operating capital obtained through loans should be raised. To stimulate economic activity in urban districts, loans with favorable conditions should be offered to support multipurpose developments that include both commercial and semi-public facilities.
Concerning public infrastructure projects, it is important to proceed them smoothly and avoid delays. We call upon the government to carry out approximately 80% of FY1998 public infrastructure project disbursements in the first half of the fiscal year. Judging from the extent of the economic recovery by the economic stimulus package, additional funding by the supplementary budget in this fall should be considered.
Funds should be distributed wherever they will be used most effectively for the construction of truly needed economic and social infrastructure, based on cost-benefit analysis without reference to how they have been distributed in the past. Top priority should be given to: increased use of information and digital technology in government, educational, medical, and other public institutions; construction of facilities for smaller families and aged people; building of infrastructure that will lead to increased efficiency in the logistics sector (such as high-grade arterial traffic routes and international airports); facilities for environmental preservation; and roads under the law of urban planning.
Also, in addition to putting the financial, technical, and managerial resources of the private sector to work in the construction of social infrastructure (referred to in some quarters as PFI), the government should also work to reduce infrastructure costs by eliminating and relaxing restrictive regulations.
Discussions on reform of the system of public retirement pensions are now under way. Employees' Pension Insurance is very unpopular with younger generations because of the disproportionately heavy burden they must bear in the future. Considering the fact that this burden is due to become even heavier, maintaining this program appears to be in doubt. To enable citizens to look forward to a comfortable retirement, it is important that the government carry out thorough reforms to make the public retirement pension system sustainable and foreseeable.
The government must fully disclose any information related the public retirement pension system and correct the inequitable age distribution of the system's burden.
In concrete terms, the basic pension part, which is intended to guarantee all senior citizens a minimum level of living, should be funded through annual tax revenues. The portion of retirement pensions paralleled with working salary and wages, on the other hand, is intended to secure a certain level of income compared to his or her working years. This pension benefit should gradually be lowered. Over a long period of time, this portion should be switched to a reserve fund system, and it should eventually be privatized.
Corporate retirement pension systems should be clearly defined as private retirement pensions. Securing the employee's right with pension benefits, the government should admit the free and diversified planning and management based on mutual agreement between management and labor and provide tax incentives to support private pension system. In particular, we strongly urge introduction of defined contribution pension system , including many advantage: portability; manageability correspondent to individual retirement life; alternative scheme to receive the accumulated money in reviewing lump sum payment system in a time of retirement. In addition, special corporate taxes should be eliminated in order to use corporate retirement pensions more.
In order to ensure a high standard of living in an age of intense international competition, it is imperative that we allow competition to spur the development of new products and services, and that productivity be improved through rationalization and streamlining measures. A concerted effort must be made to relax and/or eliminate regulations, create new types of business, and expand employment opportunities. The content of the second three-year package to promote deregulation should be expanded, particularly to include such sectors as telecommunications and employee outsourcing. The implementation of this plan should also be moved forward to the earliest possible time frame. In addition, as has been suggested in the final recommendations of the Administrative Reform Committee, an independent organization should be established as soon as possible to monitor and evaluate these undertakings by the government.
High costs reduce the international competitiveness of Japanese companies and discourage investment in Japan. To successfully reform the economy, we must correct the high-cost structure of Japan's economy and solve various problems that originate in Japanese-style economic systems.
In concrete terms, we must: build infrastructure that will improve the efficiency of the logistics sector and thereby lower transportation costs; reduce fees for public utilities; change rigid labor and commercial practices that emphasize equality at the cost of excellence; and promote standardization in order to lower product costs. Not only the government but also the private sector must work to achieve these changes.
If Japan is to break out of its current economic doldrums, the government must carry out structural reforms which will sweep away the pessimism now widely felt by individuals and corporations alike.
For the government and ruling parties, the single most effective way to stimulate the economy would be to set forth a clearly formulated process for achieving a higher standard of living and revitalizing the economy as Japan heads into the 21st century. For this purpose, structural reforms must be undertaken. The business community, as well, should: take advantage of deregulation to develop new products and services to spur increased demand; change ineffective systems; and do what they can on their own to revitalize the economy.
By carrying out structural reforms and revitalizing its economy, Japan will contribute to economic stability not only in Asia, but also around the world.
| Current tax law | Reform plan | ||
|---|---|---|---|
| Taxable income (salary of standard household) | Tax rate | Taxable income (salary of standard household) | Tax rate |
| 0 (3.54 million) -3.30 million (7.72 million) | 10% | 0 (3.54 million) - 4.00 million (9.35 million) | 8% |
| 3.30 million - 9.00 million (13.49 million) | 20% | 4.00 million - 9.00 million (13.49 million) | 18% |
| 9.00 million - 18.00 million (22.96 million) | 30% | 9.00 million - 18.00 million (22.96 million) | 28% |
| 18.00 million - 30.00 million (35.60 million) | 40% | 18.00 million) - 30.00 million (35.60 million) | 36% |
| Over 30.00 million | 50% | Over 30.00 million | 40% |
| Current tax law | Reform plan | ||
|---|---|---|---|
| Taxable income (salary of standard household) | Tax rate | Taxable income (salary of standard household) | Tax rate |
| 0 (3.03 million) - 2.00 million (5.79 million) | 5% | 0 (3.03 million) - 7.00 million (11.45 million) | 5% |
| 2.00 million - 7.00 million (11.45 million) | 10% | ||
| Over 7.00 million | 15% | Over 7.00 million | 10% |