REPORT ON JAPANESE TAXATION
BY THE SHOUP MISSION
This electronic copy is based on The Original Text: "Report on Japanese Taxation by the Shoup Mission".
The Original Text: Report on Japanese Taxation by the Shoup Mission,
General Headquarters, Supreme Commander for the Allied Powers, Tokyo Japan, September 1949.
Volume I. - IV.
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REPORT ON JAPANESE TAXATION
BY THE SHOUP MISSION
The present report on the Japanese tax system is submitted to the Supreme Commander for the Allied Powers, at whose request the Tax Mission was formed.
The chief aim of our mission has been to draw up a plan of a permanent tax system for Japan. Emphasis has therefore been placed on considerations that go beyond the financing problems of the present and the coming fiscal year. Nevertheless, we have found it necessary to specify in some detail how our recommendations affect the 1949-50 and 1950-51 budgets. The long-term program must be of a kind that can be put into force without endangering the stabilization recently achieved with the aid of the recommendations made in the spring of 1949 by the Dodge Mission.
The long-term program itself could have been either of two kinds. We could have recommended a rather primitive type of tax system, one which would depend on external signs of income and wealth and business activity, not on carefully kept records and intelligent analysis of difficult problems. Such a system could raise the required revenue, but it would perpetuate gross inequities among taxpayers, dull the sense of civic responsibility, keep the local governmental units in uneasy financial dependence on the national government, and give rise to undesired economic effects on production and distribution. Moreover, we soon became convinced that the current difficulties in obtaining fair and efficient administration of the tax laws, and a high degree of compliance by the taxpayer in Japan need not be taken as inevitable. Our aim therefore has been to recommend a modern system, which depends upon the willingness of business men and all taxpayers of substantial means to keep books and to reason carefully about some fairly complicated issues of equity. For the small taxpayer, at the same time, the task of filing returns and paying the tax should be kept a simple one. Under this approach, we see no reason why Japan may not within a few years, if she so desires, have what would be the best tax system in the world. In any event, the consistent aim of this report has been to keep open the road that may lead to that goal.
What we are recommending here is a tax system, not a number of isolated measures having no connection with one another. All of the major recommendations, and many of the minor ones, are interconnected. If any of the major recommendations are eliminated, some of the others will thereby become of less value, or even harmful. Consequently, we disclaim responsibility for the results that may follow the adoption of only part of our recommendations. For example, we have devised a tax system that avoids the double taxation of corporate income under the national income taxes, and at the same time blocks permanent tax avoidance. Among the essential parts of this system are the full inclusion of capital gains and the full deduction of capital losses, with permission to spread the gain over a series of years, and with exemption of large capital gains that are due merely to a change in the value of money. If capital gains and losses were to be included not in full but under some percentage plan like that now in effect, our set of recommendations for corporation and individual income taxes would have to revised extensively.
Members of our group arrived in and departed from Japan at different dates from April to September, 1949, devoting as much time to this task as their previous commitments in the United States allowed. In general, the mission spent about four months on the study. May and June were occupied largely in discussions with taxpayers, tax officials (national, prefectural and municipal) and others. Much of the information was obtained outside of Tokyo, on field trips throughout Japan from Hokkaido to Kyushu. Lack of space forbids specific acknowledgement to the scores of individuals who have so generously given us information and suggestions in the course of these discussions. However, we wish to note our special indebtedness to Major General William F. Marquat, Chief, Economic and Scientific Section, GHQ; Mr. Harold Moss, Chief, Internal Revenue Division, Economic and Scientific Section; the Minister of Finance, Mr. Hayato Ikeda, and his staff, particularly Mr. Keiichiro Hirata and Mr. Sumio Hara; the professors of public finance who served as official advisers to the mission, Professor Hanya Ito, of Tokyo University, Professor Saburo Shiomi, of Kyoto University, and Professor Shigeto Tsuru, of Tokyo Commercial University; and Mr. Genichi Akatani, of the Foreign Office, Japanese Government. We also extend our thanks to all the others who assisted us, including the many taxpayers whose letters were helpful in listing defects in the tax system.
The recommendations in this report are those of the tax mission, and no one in GHQ or the Eighth Army, or in the Japanese Government, is in any way responsible for them. We have attempted to adapt the recommendations to the needs of the various sections and divisions in GHQ, the officials of each of which have their own set of difficult problems to face, and who have nevertheless gone to considerable lengths to find a solution acceptable from all points of view. But the responsibility for this report attaches to us alone.
All the members of the tax mission are in substantial agreement on the main conclusion of this report, but, owing to the necessarily differing times of departure form Japan, the report in its final form was seen only by Shoup, Vickrey, and Warren; the other members should therefore not be held to the same degree of responsibility for all of the recommendations. The members of the tax mission, and their professional connections, are as follows: Dean Howard R. Bowen, College of Commerce and Business Administration, University of Illinois; Professor Jerome B. Cohen, Department of Economies, College of the City of New York; Mr. Rolland F. Hatfield, Director of Tax Research, Department of Taxation, St. Paul, Minnesota; Professor Carl S. Shoup, School of Business and Graduate Faculty of Political Science, Columbia University, (Director of the Tax Mission); Professor Stanley S. Surrey, School of Jurisprudence, University of California, Berkeley, California; Professor William Vickrey, Graduate Faculty of Political Science, Columbia University; and Professor William C. Warren, School of Law, Columbia University.
The Japanese translation was made under severe limitations of time, while the English text was undergoing some last-minute revisions. In the event that any discrepancy is found, the English text should be the one used.
TABLE OF CONTENTS
- Chapter 1 - THE JAPANESE TAX SYSTEM
- Section A - Total Tax Yield
- Section B - Tax Yield and National Income
- Section C - National, Prefectural and Municipal Financial Relation
- Section D - Direct and Indirect Taxes
- Section E - Pattern of Direct Taxes
- Section F - Pattern of Indirect Taxes
- Section G - Administration
- Section H - Equity
- Section I - Economic Stability
- Chapter 2 - INTERGOVERNMENTAL FISCAL RELATIONS
- Chapter 3 - PROSPECTS FOR GOVERNMENT OUTLAY, AND CORRESPONDING TAX CHANGES RECOMMENDED
- Chapter 4 - THE PERSONAL INCOME TAX: RATE AND EXEMPTIONS
- Chapter 5 - PERSONAL INCOME TAX : OTHER PROBLEMS
- Chapter 6 - CORPORATIONS
- Chapter 7 - PROBLEMS COMMON TO THE PERSONAL AND CORPORATION INCOME TAXES
- Chapter 8 - TAXES ON GIFTS AND BEQUESTS
- Chapter 9 - TOBACCO PROFITS AND LIQUOR TAXES
- Chapter 10 - OTHER INDIRECT TAXES AND CUSTOMS DUTIES
- Chapter 11 - THE INHABITANT'S TAX
- Chapter 12 - THE REAL ESTATE TAX ( LAND AND HOUSE TAX )
- Chapter 13 - OTHER LOCAL TAXES
- Chapter 14 - COMPLIANCE, ENFORCEMENT, AND APPEAL UNDER THE INCOME TAX
- The Goal System
- Declaration of Estimated Tax
- Returns and Payment Tax
- Assessment and Collection of Farm Income
- Right of Taxpayer to Protest the Reassessment
- The Role of Accounting
- The Trade of Associations
- Scholarly Interest in Taxation
- Appendix A - FINANCE OF LOCAL GOVERNMENTS
- Section A - Problems of Local Finance
- Section B - Needs for Stronger Local Government
- Section C - Can Japan Afford Better Local Government?
- Section D - Division of Functions
- Section E - The Local Tax System
- Section F - Financial Requirements of Local Government
- Section G - Subsidies
- Section H - Equalization Grants
- Section I - Implementation of Equalizations
- Appendix B - TREATMENT OF IRREGULAR INCOMES UNDER THE PERSONAL INCOME TAX
- Section A - General Relief for Irregular Incomes
- Section B - Losses
- Section C - Special Types of Irregular Income - Forestry
- Section D - Capital Gains
- Section E - Capital Losses
- Section F - Evasion and Enforcement of Tax on Capital Gains
- Section G - Adjustment of Basis
- Section H - Inflation Gains
- Section I - Inflation Losses
- Section J - Future Price Fluctuations
- Appendix C - REVALUATION OF ASSETS
- Economic Considerations
- Method of Reappraisal
- Corporations with Adequate Accounting Records
- Individuals with Adequate Records
- Timber Land
- Where Records are Lacking or Inadequate
- Adjustment Common to all Depreciable and Depletable Properties
- Determination of Policy and Review of Reappraisal
- Filing Requirements and Standards Applicable After Revaluation
- Effective Date of Reappraisals
- Reappraisal Gains
- Exception to General Rules Applicable to Reappraisal
- Effect of Reappraisal on Revenue Collections
- Experience in Other Countries
- Appendix D - ADMINISTRATION OF THE INDIVIDUAL & CORPORATE INCOME TAXES
- Section A - Introduction
- Section B - Voluntary Compliance and Self-Assessment
- Section C - Procedural Steps in the Administration of the Income Tax
- Subsection 1 - Declaration of Estimated Tax
- Subsection 2 - Withholding
- Subsection 3 - Returns and Final Payment of Income Tax
- Subsection 4 - Procedure Applicable to Farm Income
- Subsection 5 - Re-Assessment of Returns
- Subsection 6 - Taxpayer Protest of Reassessed Amount
- Subsection 7 - Litigation
- Subsection 8 - Penalties
- Subsection 9 - Refund Procedure
- Subsection 10 - Delinquencies
- Subsection 11 - Simplification of the Tax Structure
- Section D - Internal Administration
- Section E - Collateral Matters
- Section F - Conclusion