Takahiro MIYAO (GLOCOM)
In his commentary "Tax 'Reforms' Could Worsen Japan's Economy: Blood From a Stone," Richard Katz presents an interesting account of the positions that are taken by the MOF and Koizumi Cabinet members, and expresses his own view regarding the current debate on tax reform in Japan. While he gives an accurate explanation about the MOF's position by saying that it is "primarily concerned with closing the budget deficit," his description of the positions of Finance Minister Shiokawa and Economic Minister Takenaka is quite misleading, especially regarding Takenaka's stance.
Richard Katz should have made it clear that the main battle line has been drawn between the government's Tax Commission chaired by Hiromitsu Ishi (not "Ishii" as misspelled by Katz) who advocates the MOF's position on one hand and the Council of Economic and Fiscal Policy headed by Minister Takenaka on the other. While these two camps are more or less pursuing tax reform for flattening tax rates and balancing the budget in the long run, they sharply disagree on immediate steps to revitalize the Japanese economy. The MOF camp is opposed to any tax cut, whether income or corporate taxes, whereas Minister Takenaka and private sector members of the Council of Economic and Fiscal Policy insist on net tax cuts, especially corporate taxes, to stimulate business activities.
In this context, it is misleading to emphasize that "at the same time, Takenaka and the opposition Democratic Party of Japan propose lowering the minimum income level at which people pay taxes." This sounds like Takenaka wishes to balance the budget while reducing corporate taxes. Actually, it is not Takenaka, but the MOF that wishes to do so. Therefore, the government's Tax Commission is proposing a "pro forma tax" that would levy corporate taxes on the basis of nonincome criteria for the purpose of financing corporate tax cuts. And this conservative attitude is now being criticized by Minister Tanekana and the members of the Council of Economic and Fiscal Policy. Furthermore, In view of this division within the government, Finance Minister Shiokawa has somehow changed his stance from pro-MOF fiscal conservatism to pro-business fiscal activism with net tax cuts at least in the initial stages of tax reform.
All these important points are missed by Richard Katz, who appears to be too eager to criticize Takenaka's argument for flattening income tax rates by emphasizing the typical Keynesian idea that "flat taxes flatten demand." However, he fails to point out that Takenaka's proposal for flattening tax rates is better than the MOF version, because the former is revenue-neutral involving tax cuts for higher income groups, while the latter is revenue-raising with no tax cuts involved.
Finally, regarding real estate taxes, Richard Katz heavily quotes from Richard Koo that "the combination of low holding taxes and high capital gains taxes creates perverse incentives. There is no tax penalty for leaving property unused." Such an argument was quite common among economists, when the real estate market was more or less "normal" before the collapse of the land market in the 1990s. More recently, however, real estates taxes, whether holding taxes or capital gains taxes, are too heavy an obstacle for the transfer and utilization of real estate, as many property owners are suffering from asset deflation and stuck with huge real estate loans in addition to heavy taxes. For this reason, current holders of real estate have lost much of their lobbying power, contrary to Katz' account. He might as well propose to eliminate all property related taxes, at least temporarily, to combat asset deflation and stimulate aggregate demand through asset effects.
For related discussions, see "Deflation in Japan: Moderator's Summary and Comments" on the GLOCOM Platform: