"My last and greatest reform," Prime Minister Yasuhiro Nakasone calls it. When he steps down from his post, as he is expected to do next fall, he hopes to leave behind at least one lasting legacy: a comprehensive reform of Japan's tax system. Last week his goal seemed within reach as Japan's ruling Liberal Democratic Party approved a plan to overhaul the tax code from top to bottom. The party will submit the proposal to Japan's Diet early next year. Much like this year's revamping of the U.S. tax code, the new program aims at dramatic cuts in income taxes to make the system both more just and less complex. It would represent the first real reform of the Japanese tax code in 36 years.
For individuals the top tax rate would drop from 84% to 65%, while for corporations the maximum rate would decline from 52.9% to less than 50%. Total savings: $27.5 billion. The reform will simplify the system by reducing the number of tax brackets from 15 to six. To help make up for the loss in revenue, the plan outlines a new maximum 5% value-added tax, which is similar to a sales tax, and recommends a 20% levy on interest from savings. For the first time in 66 years, interest on small savings accounts would be taxed.
Tokyo's short-term goal, of course, is to give a boost to the country's sagging economy. Japan's gross national product is expected to grow this year by just 2.3%, its lowest level since 1974. The government believes a cut in income taxes will spark not only consumer spending but business investment. At the same time, however, Nakasone wants to reduce Japan's $840 billion national debt. To that end, the sales tax and savings-interest levy are expected to generate revenues of $28 billion.
The tax plan could also begin to reduce Japan's mammoth trade surplus and thus ease frictions with Western nations. The Japanese surplus with the U.S. is expected to reach a record $57 billion this year, up from $50 billion in 1985. The cut in income taxes should encourage Japanese consumers to buy more imports. The value-added tax applies only to goods manufactured in Japan,' which means that imports could become more competitive. U.S. Treasury officials said they were pleased with the tax-reform proposal. It represents a fundamental step for Japan away from subsidizing savings at the expense of consumer spending.
Nakasone's plan enjoys a good chance of passage. Reason: his Liberal Democratic Party controls 307 out of 512 seats in the Diet's lower house and 144 out of 252 in the upper chamber. Still, strong opposition has already surfaced, especially to the imposition of new taxes. In last July's general election, Nakasone promised that he had "no idea of introducing a large-scale" sales tax. While the Prime Minister will maintain that a 5% levy does not qualify as "large-scale," many Japanese consumers will resent the burden nonetheless. Some lawmakers are attacking the plan on more general grounds. Says Diet Member Shigeru Aoki: "The problem with this package is that it has no philosophy. It calls for tax reductions on the one hand and tax increases on the other."
Serious tax reform, in any country, always arouses serious passions. Passage of such a sweeping program will be a supreme test of Nakasone's political will, skill and power.