In October 2019, the consumption tax rate is scheduled to rise to 10%. Many people may not be aware of the fact that a portion of the consumption tax is a prefectural tax known as the local consumption tax (currently, this accounts for 1.7 percentage points of the 8% consumption tax rate), and of the 2% increase in the consumption tax rate to occur in 2019, 0.5 percentage points will be this local consumption tax.
Certain issues have become apparent in relation to the uneven distribution of local tax (regional disparity in per-capita tax revenue) because of this tax rate increase. There is concern that tax revenue that will rise because the tax rate increase will be concentrated in large cities such as Tokyo, and the disparity between regions' tax revenues will be further exacerbated.
It is not only local consumption tax that is conspicuously uneven. Corporate inhabitant tax and corporate enterprise tax, which are the two sorts of local corporate tax imposed by local governments, are also extremely uneven. About a quarter of tax revenue from the two sorts of corporate tax is concentrated in Tokyo. If you look at all local taxes combined, the difference between the highest and the lowest per-capita tax revenue is about 2.4 times, but the difference increases to 6.1 times for the two sorts of corporate tax (per 2016 figures). The National Governors' Association has suggested that "with regard to local corporate tax, we should create a local tax system with minimal unevenness by taking new measures to correct any disparity," given the significance of local corporate tax.
Until now, the national government has collected the two sorts of corporate tax as national taxes, and reallocated the funds to local governments in the form of local tax grants and transfers. Because of this, approximately 460 billion yen in tax revenue has been reallocated from Tokyo to local governments. Of this, the amount of nationalized corporate enterprise tax will be abolished (it will revert to prefectural tax), coinciding with the increase in the consumption tax rate in 2019. The "new measures to correct any disparity" referred to by the National Governors' Association include continuing the nationalization of corporate enterprise tax after the tax rate increase.
At a glance, it appears that large cities and regional areas are politically opposed to each other. However, a more fundamental issue is the reliance of local governments on the two sorts of corporate tax. These two taxes account for almost 20% of local tax revenue and a quarter of prefectural tax revenue. This state of affairs has not only resulted in unevenness, but also has created instability in local tax revenue.
For example, following the collapse of Lehman Brothers, Tokyo's tax revenue decreased by approximately one trillion yen. From the perspective of a "stable local tax system with minimal unevenness," the two sorts of corporate tax, which vary greatly according to economic conditions, are not ideal. In addition, the two sorts of corporate tax have increased the effective corporate tax rate in Japan. The effective corporate tax rate refers to the combined rate of national and local corporate tax.
At present, the Japanese effective corporate tax rate sits just below 30%. However, the national corporate tax rate is only about 23%, so local corporate tax must account for over 6%. This level is higher than other countries, including the United States at 28%, China at 25%, and the United Kingdom at 19%. In the global economy, a high corporate tax rate can undermine international competitiveness for businesses that are located in Japan.
Naturally, even if the corporate tax rate is lowered, firms may simply decide to use the windfall to build up their internal reserves. However, it is also vitally important to develop venture firms and create an environment conducive to firms increasing capital investment and employment. In fact, reducing corporate tax and increasing consumption tax and environmental tax have been the recent trendof overseas tax reforms.
In this manner, it can be said that uneven sources of tax revenue not only cause inequality among regions, but also that local governments are dependent on revenue from the high rates of the two sorts of corporate tax. The solution to these issues lies in drastic tax reforms that include the composition of tax revenue.
* Translated by RIETI.