Kiichi Miyazawa, the Japanese finance minister, has announced that he plans a huge reform of the Japanese tax system over the next three years. An advisory committee has been created to come up with reform recommendations.
At 130% of GDP, Japan has the highest debt burden in the industrialized world, and economists have long suspected that an overhaul of the tax system is necessary to reduce this debt.
Tax reform is a sensitive issue in the country, where the last increase in consumption tax in 1997 helped bring about a recession. The first proposals of the new committee are still likely to suggest a massive raise in consumption tax from the current 5% level. According to Dean Yoost, tax partner at PwC in Tokyo, there are several other likely changes. Reforms are likely in the corporate reorganization area that will help to increase mergers and acquisitions, especially in net operating loss carryovers, consolidating returns, the introduction of local taxes and a rethink on the taxation of financial products. All of these reforms may help to get the economy back on track. They are also likely to anger taxpayers, who will bear the brunt of the increased taxes, and some taxes, like the local ones, may have a negative effect on businesses.
Then there is the fact that the Japanese economy may not be economically strong enough to cope with the reforms, and that Japan's current low tax rates are competitive for foreign investors.
As Yoost says: "The government is in a dilemma. They have low tax revenues suggesting they need a tax increase. They have stable consumer spending, yet they've been spending tremendous amounts and building trains going nowhere to increase investments. The only way this could work is if the government goes bankrupt or somehow collects more tax revenues. It's a vicious circle, that's why we've been in a recession for 10 years. We don't seem to have the courage to make some difficult decisions."
