02/08/2011 Social Security and Tax Reform

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(Chairman) Mr. Yasuo Tanaka, please.

(Yasuo Tanaka) Good morning. I’m Yasuo Tanaka.

No country that ever existed has succeeded in boosting its economy by raising taxes. Increasing revenues rather than taxes must be a mission for any statesman to pursue. This is what I pointed out during my representative questioning at a lower house plenary session on January 27th.

I was (happily) surprised to hear a big applause at the time, which came from both the ruling and opposition camps. Most DPJ members apparently also agreed to what I said. That means, everyone that ever lived is happier, if taxes are lower.

That’s why some of the rich people open a bank account in private banks in Switzerland and big companies establish dummy companies on the Cayman Islands in the Caribbean Ocean. The manipulative practice of personal finances continues even today.

The DPJ achieved a change of government with the promise of not raising the consumption tax. The DPJ pledged in its election manifesto that the party won’t raise the consumption tax, but instead, will finance its new policies by drastically reducing wasteful spending. Based on this main premise, the People’s New Party and New Party Nippon—-a ruling parliamentary group—- agreed to form a coalition government with the ruling DPJ.

However… at a meeting held at the Prime Minister’s Office, Mr. Kan said public understanding is mounting. He apparently meant tax hikes are necessary in order to review social security. What was even more stunning was that Mr. Yoshito Sengoku was talking about creating a society where people feel happier paying taxes rather than receiving welfare benefits. It sounded like bad old days’ spiritualism of ‘I won’t ask for it, until I win.’ Not so fast, Mr. Sengoku, I would have to say. Isn’t it like a road we’ve been down before? It’s almost like ‘a robber lecturing his victim on how NOT to be robbed.’

Let’s say, the government is sharper and smarter. Then, are diet members who gave me a big applause so naive?, or are they out of touch with the reality? They can’t be. Talking about a consumption tax increase without even attempting to deliver what you pledged to the public is, in deed, like putting the cart before the horse. I already said that during a meeting of the government and the ruling party social security reform council held at the Prime Minister’s Office on January 21st. By the way, Mr. Kan, do you happen to know the percentage of companies not paying corporate tax at all?

(Finance Minister Yoshihiko Noda) 70 percent.

(Yasuo Tanaka) So, 70 percent of all companies are NOT paying corporate tax at all. Precisely, 71. 5 percent. So it’s not only small and medium or ultra-small companies that are not paying corporate tax. Even among companies with a capital of over 100 million yen, the majority, 51 and a half percent, isn’t paying corporate tax at all, not even one yen.

The statistics exclude the total number of corporations that are adopting consolidated accounting. In reality, almost 60 percent of all listed companies that are the members of Nippon Keidanren (the Japan Business Federation) or the Japan Association of Corporate Executives aren’t paying corporate tax at all. I think people watching this live broadcast on television or radio, or via the Internet, must be baffled. They can’t believe their ears!

Just to give you a concrete example, I have a personal experience on this. Near Lake Suwa in Shinshu, where I served as governor, a leading computer printer company with a pretty big market share had its head office. The company originally was known globally for quartz. It’s an enterprise with a capital of 50 billion yen and its sales exceed one trillion yen. It’s not my intention to single out any one company, because the case applies to a vast majority of corporations.

One year after I took office as governor, the company I’m referring to fell into the red. For the public, the bursting of the Information Technology bubble was to blame. But in reality, the company deliberately purchased an electrical equipment maker which had been insolvent for quite a long period of time. The company became the parent company of the insolvent maker. That was the real reason of the company falling into the red. When filing earnings report, the insolvent subsidiary was included in the company’s consolidated accounting and it also temporarily run a deficit. The rest is history. The leading computer printer firm with sales topping one trillion yen ended up paying no corporate tax, or it’s successfully avoided paying any business tax.

In accordance with the law, the company got away with paying only 800 thousand yen a year in Corporation Inhabitants Tax, which is a residence tax for corporations. Back then, the prefecture was financially-strapped and I was indeed struggling to turn the situation around. This example is not an isolated anecdote and it’s happening all over Japan. Major corporations are on a roller-coaster ride in terms of paying (or not paying) corporate taxes. On the other hand, these companies apparently have the money to use celebrities to air big TV commercials.

Once a company runs deficit, it’s exempt from paying corporate taxes for the maximum 7 years. It’s similar to city banks and mega banks not paying corporate taxes for over 10 years after being injected with public funds to bail out them.

But when we think about a big company paying only 800 thousand yen a year in corporate inhabitant tax (comparable to individual residence tax), the amount is even lower than what you and I are paying in residence tax. It makes us wonder. And even though these companies aren’t paying corporate taxes, they are nevertheless using national roads and social infrastructure, free of charge to transport products on trucks. Why such a paradox? The outrageous situation is the product of a mechanism of corporate taxes that are imposed on profits.

On the other hand, the public is taxed on spending and is paying in the form of consumption tax. If tax, by principle, should be broad-based, stretched-thin, and should be paid fairly, I think companies shouldn’t be paying on profits either. They should also be taxed on spending. That’s why I’ve been advocating the swift introduction of standard corporate tax (or, pro forma standard taxation). On this, I would like to hear what Social Security and Tax Reform Minister Kaoru Yosano has to say.

(Social Security and Tax Reform Minister Kaoru Yosano) I understand that Mr. Tanaka is suggesting the need of introducing the standard corporate tax, the cash flow tax, in which corporations are taxed on spending, as we try to reform social security and the tax system in one package. But corporations are taxed on profits that generate from corporate activities. That means they are taxed on their income. My understanding is other countries are also making corporations pay taxes based on their income.

(Yasuo Tanaka) I believe we need a fair, just, open, transparent and simple tax system which can be easily understood by the public. The system needs to fulfill those five basic principles. What I’m proposing is the standard corporate tax in which corporations are taxed not on profits but on spending, to satisfy the 4th principle.

You said ‘other countries,’ but Japan is a super-graying society with an extremely low birthrate. It’s an unprecedented territory Japan is ushering in ahead of any ‘other country.’ If Japan’s manufacturing industry was recognized by the international community for being the first and unique, you shouldn’t let negativity get to you, or you shouldn’t be making a statement, reading the memo. You should be a professional in selling social security and tax reform. So I urge you to make a decision.

Or else, by the logic of capitalism, major corporations will be allowed to freely continue acquiring other companies without even paying taxes. On the contrary, some established firms, which won’t seek expansion but cherish existing customers, keep their businesses within their means and remain in the black, will continue paying taxes dutifully.

If I’m not mistaken, Mr. Kan, at first, you were saying we need to review TAX and SOCIAL SECURITY. But now, you are saying overhauling SOCIAL SECURITY and TAX. You changed the order. This is almost like saying to the public, if you want better welfare, we’ll increase your tax burden. It’s the same deception as a robber lecturing his victim on NOT to be robbed or, six of one and a half dozen of the other. Two years ago, already, the lowest minimum wage was lower than social welfare benefits in 12 prefectures across the nation. That’s one in every four prefectures/

Let me give you the actual figures. A family of three (meaning a couple and a child) living on welfare receives the monthly payment of 240 thousand yen. A bachelor in his 20’s also gets 140 thousand yen a month. Their medical costs are free. They are also exempt from paying taxes including the residency tax. Of course, the government should support people with disabilities whose playing field isn’t level. But just as I pointed out earlier while talking about the corporate tax, the downside of this is the underlying absurdity. If you work, you don’t eat and if you don’t work, you shall eat. Who would trust the politics if we allows this absurdity to continue to this day? As of today, 2 million people or, 1 point 4 million households, are living on welfare. That’s approximately e population of two government-designated cities living on welfare, receiving benefits that are higher than the minimum wage.

That’s why I have always advocated the introduction of Basic Income in which people of all ages, including the new-born and the elderly, shall receive monthly payment of fixed, basic income. The payment is made not by household, but by individual basis.

I will elaborate on this later, but making multiple proposals with tax increase attached to them will be a bottleneck similar to labor bargaining on pay scale. So, here is an invoice. The Japanese consumption tax is different from the consumption tax in the rest of the developed countries.

An invoice or bill is a commercial document issued by the seller to the buyer. For instance, when a firm procures materials, produces parts and sell them to a major corporation, it attaches to its products a detailed bill, which is an invoice, for the total cost plus the 5 percent consumption tax. As long as you have slips, you can do that. But if the seller is the weaker in their power relationship, he may not include the consumption tax in the invoice. Then, it’s the lost revenue for the smaller company. And if the buyer, which may be a leading producer of final goods, adds the consumption tax onto the final products, that’s a gained revenue for the leading corporation. That’s why introducing invoices to the consumption tax system is indispensable.

Mr. Yosano and Mr. Kan may be trying to introduce the British system of moderate welfare / moderate tax burden in Japan. But the British consumption tax is a VAT, value-added tax. In Britain, medicine, education, welfare, finance and insurance are exempt from the consumption tax. It’s zero rating. For example, food, public transportation, books, or home-building are all tax-free. And there’s what’s called a reduced tax rate of 5 percent, which is applied to electricity, gas and many other items including sanitary products for women. Other goods are taxed at 17.5 percent. The tax rate in the end evens out at 10 minus percent, as indicated by the estimates from various institutions.

I think Mr. Yosano is saying Japan needs to raise the consumption tax by 8 or 9 percent to achieve a surplus in the primary balance. That would make the tax rate to 13 or 14 percent, which is even higher than that of British tax rate under the moderate welfare / moderate tax burden system. If Mr. Yosano calls that moderate welfare / moderate tax burden, I believe there’s wasteful spending in the administrative and executive systems, which we pointed out before the change of government. I think Mr. Yosano should refrain from making such argument without clarifying the facts.

Lastly, I’d like to ask Mr. Seiji Maehara about a statement he made at a national convention for the return of Japan’s northern territories. Maehara clearly stated that he will stake his political life on the return of the islands. He also said he hopes to make it happen as soon as possible. I think he meant he would achieve that goal during his term in office as Foreign Minister. That’s how weighty the phrase, ‘political life,’ is. To prevent gossipy people from calling you ‘gang leader all mouth’ I challenge you to make the declaration here.

(Foreign Minister Seiji Maehara) I made the statement during the national convention for the return of Japan’s northern territories, because the northern territorial issue is one of the reasons why I decided to become a lawmaker. I learned about the dispute in details from Mr. Ichiro Suetsugu while studying at the Matsushita School of Government and Management. I believed without a solution to the dispute, there’s no end to world war two. The remark I made yesterday reflected my aspirations on the issue.

(Chairperson) Mr. Tanaka, time is running short.

(Yasuo Tanaka) But when someone says he will stake his political life, it usually means he will deliver while in office. As we listen to you, Mr. Foreign Minister, you meant political life ‘untill you die.’ That kind of rhetoric leads to public distrust in politics.

The introduction of invoices and the taxpayer numbering system, the conversion to VAT… all these are already urgent. The introduction of the standard corporate tax will help increase awareness of the importance of paying taxes among salaried workers as well. It will also help boost public interest in politics. People will be able to better understand the tax system should be fair, open and simple, by filing an income tax return on their own.

I urge the current administration to follow through these five principles.

(Chairman) Thank you, Mr. Tanaka. Time is up.

(Yasuo Tanaka) Thank you, Mr. Chairman.

(Chairman) This concludes questioning by Mr. Tanaka.