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October 4, 1995
[SSJ: 321] Legacy of the 1940 Fiscal System
From: Andrew DeWit
Posted Date: 1995/10/04
Summary of Presentation to PhD Kenkyukai, International House, Roppongi. October
3, 1995
Bureaucratic Manoeuvres on the Tax Fields: The Legacy of the 1940 Fiscal System
By Andrew DeWit
Abstract:
This presentation argues that the postwar reconstitution of Japan's 1940 tax
system shaped institutions that produce a distinctive kind of tax politics in
Japan. These institutions include the Tax bureaux of the ministries of Finance
(MOF) and Home Affairs (MOHA), the local tax regime, and the structure of
redistribution from the central state. MOF and MOHA sometimes collaborate for
increased resources on specific tax fields; but most often they compete over
resources, and especially when they share authority over a tax field nearing
fiscal exhaustion. In most cases, the interministerial politics comes at the
cost of local fiscal autonomy. Recent examples of these interactions are seen in
MOHA's cooperation in eliminating the Electricity and Gas taxes when the
Consumption Tax was adopted. Competition is, by contrast, evident in the Land
Value Tax episode, the struggle over the Local Consumption Tax, and the current
sparring concerning corporate income taxes.
This work takes issue with earlier arguments emphasizing the growing autonomy of
local governments, especially their capacity to work around fiscal constraints.
These arguments, while not wholly incorrect, overshot the limits of the evidence
by neglecting the institutional environment of tax control, the divergent and
manipulable fiscal interests among the local authorities, and the emphasis in
fiscal control of promoting uniformity and equity.
The Prewar Tax System
The basis of the prewar tax system was the land tax (chiso), the business tax
(eigyouzei), the income tax (shotokuzei), and surtaxes imposed -- according to
central-state approval -- on these national taxes. Transfers from the central
government were negligible in the prewar era. The fiscal system of this period
has been characterized as one that was "deconcentrated and decentralized,"
because central-state authority over the local tax regime emphasized denial
rather than outright control. The centre, in other words, aimed at keeping local
authorities from encroaching on tax fields that the centre was using to fund
national defence and industrial development.
Fiscal problems in the inter-war years, however, made the adoption of a
redistributive system and comprehensive income taxation appear necessary to
social-policy bureaucrats, especially those in Naimusho (Home Ministry).
Several efforts at securing this kind of tax reform were stymied by the
opposition of big business in particular, as the policy goal would have seen the
tax burden shifted onto the modernizing, urban sector in order to relieve rural
interests.
The 1940 Reform
There were two major policy objectives in the 1940 reform: revenues for
warfighting and a redistributive system. There is very clear evidence that a
powerful redistributive system was constructed, and that the system emphasized
the maintenance of social stability in the rural areas along with reinforcing
them for their role in the war effort. Moreover, the means adopted to these ends
included a schedular income tax, indicating the bureaucracy's concession to
powerful private interests that had previously fought off comprehensive income
taxation.
Japanese local governments lost their authority over local taxes through the new
system, as standard rates were specified and enforced by the Home Ministry. The
hallmark of this regime of tax control was and remains uniformity, a sharp
contrast to the previous large gaps in tax rates among the local authorities.
The differences in fiscal capacity among local authorities levying uniform rates
was filled in, at least in part, through the use of a Distribution Tax
(bunyozei). This saw a set percentage of the national personal and corporate
income taxes devoted to the tax and thence redistributed to local authorities on
the basis of need.
The Postwar Reforms
Shoup (1949-50) emphasized the need for local fiscal autonomy and a clear
separation of tax bases and programmatic responsibilities between the various
levels of government. The philosophical core of this approach was the very
American conviction that democratic behaviour was fostered by strong local
governments and the ability of electors to perceive which level of government
held administrative responsibility for specific taxes and programmes. Shoup also
recommended that the Distribution Tax (called the haifuzei from 1948) be
replaced by a system of equalization grants, whose method of calculation and
transfer to recipients would be between the central state and the local
authorities. The membership of the Commission was to be drawn heavily (3 out of
a proposed 5 members) from among the six national associations of governors and
other local administrators (jichi roku dantai). Powers exercised by the
Commission were to include the allocation of shares of maximum allowable local
debt, determining the basis fr distribution of equalization grants, and
temporary suspension of the maximum rates of local taxes when it deemed
appropriate.
The Deconstruction of Shoup
The Occupation reforms are of great significance, but not, as many still hold,
that the current Japanese tax system is based on Shoup. On the contrary, the
reforms are important because they were so rapidly and consistently
deconstructed in favour of the wartime fiscal system. In this sense, Shoup
represents an interesting test case for assessing the abiding influence of the
institutions associated with the 1940 system.
One of the most salient shifts back to the wartime system was seen in the area
of redistribution. Shoup's system of equalization grants supervised by an
autonomous Commission was not realized; indeed, it was not seriously considered,
as the Local Autonomy Agency was reorganized in 1952, being renamed the Autonomy
Agency and absorbing the Local Finance Commission. The Distribution Tax system
became the Allocation Tax system in 1953, and was the focus of much friction
between MOF and the Local Autonomy Agency until the two compromised on including
fixed percentages of the national income taxes and the liquor tax in the
Allocation Tax. The latter tax was then effectively transferred to the Autonomy
Agency and distributed to the local authorities according to a complex formula.
This arrangement continues, with the current Ministry of Home Affairs having
been set up in 1960 to replace the Autonomy Agency.
At first glance, the above arrangement appears quite reasonable and
depoliticized, insofar as there are regularized procedures for determining the
approximate volume of Allocation Tax revenues to be distributed as well as a
formula governing that distribution. However, the local authorities are not
party to the negotiations on setting the percentage of national taxes to be
included in the Allocation Tax, nor are they represented in an autonomous and
disinterested commission -- as proposed by Shoup -- when decisions are made on
distribution. In fact, 6% of the total funds for the Allocation Tax are
deposited into the special allocation fund, which allows for ministerial
discretion in transfers.
The essential point here is that the centralized fiscal control of the wartime
system has in large measure been reintroduced. Shoup was not revised
willy-nilly, but rather with a fairly clear aim of returning to what had been in
place prior to the Occupation. Controlled local tax rates and direct management
of local debt have been reestablished, albeit in a far less powerful ministry
than was the old Home Ministry
Moreover, though MOHA and its postwar predecessors are far less powerful than
the Home Ministry was, there is a much larger fiscal terrain to manage and
protect. The 1940 tax reform sought to secure stability and a rough fiscal
equity among the local authorities, and hence transfers from the central state
doubled. But this figure was only twice an already low base of transfers in a
relatively small economy, meaning that the aggregate level of expenditures was
not great. By contrast, the rapid growth of the Japanese economy in the 1950s
and 1960s generated an enormous volume of tax resources for collection and
redistribution. As noted earlier, over half of the central state's current
expenditures are transfers to the local authorities, through the Allocation Tax,
subsidies, and other means, while close to two-thirds of programme spending
takes place at the local level and one-third of overall taxation is collected
there as well. In consequence, there is both a large tax state in absolute terms
and a massive fow of funds among its various levels of government.
The reason for emphasizing these features is to highlight the enormous tax
fields on which MOF and MOHA position themselves. Compared to the prewar and
wartime years, the two ministries now have powerful motivations for
collaborating or engaging in conflict on tax fields such as fixed-assets (ie,
property), corporate income, and consumption. I will discuss instances of this
in turn.
The Corporate Income Tax
The split of tax jurisdiction between MOF (houjinzei) and MOHA (jigyozei,
houjinjigyouzei) is implicated in the current anomaly of comparatively high
corporate taxation, as MOHA has in the past resisted efforts by the LDP, MITI,
and business lobbies to get the corporate tax burden reduced. MOF also
engineered some striking cuts in special tax measures in the 70s and 80s, which
rendered effective tax increases. I believe MOF and MOHA generally collaborated,
at least implicitly, in keeping the corporate burden high even as tax
expenditures threatened to erode its base completely. There was evidently a
positive-sum game going on between the two bureaucracies, one dependent on the
fact that room for high rates existed (due to high growth and Japanese
companies' ability to pass the tax burden onto consumers). Indeed, the tax
provides a further example of MOHA's ambiguous stance towards local autonomy, as
the ministry -- especially its Finance Bureau -- pressures local authorities not
to raise the Enterprise Tax byond the average in order to prevent increased
local corporate tax revenues from causing reductions in the amount of Local
Allocation Tax from MOF. But in the recent period, the fiscal contest has turned
zero-sum, as corporate tax cuts are inevitable because of tax competition from
other Asian countries, the threat of hollowing out of employment and industry,
and so forth. MOF and MOHA are responding to these challenges by seeking to
ensure that the burden of cuts is borne by the other's tax.
The Consumption Tax
MOHA pressured the larger prefectures and the metropolises (Tokyo, Osaka) not to
oppose the Consumption Tax, even though they were to lose the Gas and
Electricity taxes, which were collected locally. Hence MOHA was willing to
support a measure that cost some local fiscal autonomy, in favour of a larger
fiscal pie. The smaller prefectures and municipalities also gained, as they
benefited little from the taxes that were eliminated, and received part of the
Consumption Tax in the Allocation Tax fund.
The Land Value Tax
This was enacted in order to control land prices, and is borne largely by
business interests in the major urban centres. What is less well-known is that,
through the summer of 1990, a protracted fight took place in the Government Tax
Commission's Subcommittee on Land Taxation over whether the tax should be
national or local. MOHA argued that the tax should be local, as it was to
imposed on the property tax base base. MOHA regards property tax as specifically
reserved -- ironically enough, by Shoup -- for the municipalities, and hence as
MOHA's territory. The imposition of the Land Value Tax also placed a potential
constraint on deriving additional revenues from that tax base, and thus the
episode can be seen as a further detraction from local fiscal autonomy.
The Local Consumption Tax
This was the source of a major fight between MOF and MOHA, especially their Tax
Bureaux. The major stumbling block was MOF's opposition to local collection.
MOHA officials had been seeking to secure at least part of the Consumption Tax
since the mid-1980s, in compensation for their having acquiesced to the
elimination or rationalization of several local taxes. Also, Tokyo Gov. Suzuki
mobilized the Jichi Roku Dantai to produce reports calling for a local
consumption tax. The impetus for this general mobilization came from pending
cuts in national and local income taxes, the damage the Heisei Recession was
doing to prefectural revenues, and MOF Finance Bureau's efforts to push through
cuts in the Allocation Tax. The fight over the tax centred on whether there
would be local collection, as MOF had to make some concessions due to the
Socialist presence in the coalition Cabinet. MOF and MOHA Tax Bureaux carried on
a very public battle over the issue of collection, one that involved a variety
of inflammatory stateents to the press and other manoeuvres. In the end,
politicians interceded and cut a deal that saw national collection "for the time
being" on behalf of the local authorities of a Local Consumption Tax that --
when implemented in 1997 -- will represent 20% of the 5% Consumption Tax. The
revenues will be transferred to the MOHA Finance Bureau, and the local
authorities are already concerned that the regulations on distribution are
highly ambiguous.
Note: The concept of the prewar "deconcentrated and decentralized" and postwar
"concentrated and decentralized" fiscal systems is found in the work of
Professor Naohiko Jinno (Univ. of Tokyo, Economics Dept).
Approved by ssjmod at 12:00 AM