On the Dividend Exclusion for Life Insurers and Other Corporations - The Need for Further Reform

Akira Komatsubara 


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As Japan continues to struggle with the aftermath of the bubble economy, economic and fiscal structuralreforms remain a top priority to reinvigorate the economy.

In fiscal structural reform, the debate has moved toward an aggressive stance of not only reviewingsocial security and other expenditures, but effecting tax reforms in the hope of building an infrastructurefor a “fair and vigorous society.”

Given this situation, the government’s Tax Commission released a report last July (“The CurrentSituation and Issues Regarding the Japanese Taxation System - Working for Participation andMaking Choices Towards the 21st Century”) which presents tax reform proposals based on the principlesof fairness, neutrality, and simplicity.

According to the report, further personal income tax cuts will be difficult, given that tax cuts recentlyimplemented as part of tax reforms and fiscal stimulus measures already make Japan’s income tax burdenlow by international standards. As for the corporate income tax, the effective tax rate has alreadybeen slashed to international levels to enhance Japan’s business competitiveness. As a result, corporatetax reforms will focus on improving fairness, neutrality and transparency.

In other words, further reform of personal and corporate income taxes will focus on neutrality and fairness,with little emphasis on reduction.

Meanwhile, the consumption tax is deemed critical for maintaining economic vitality in the face of theaging population, particularly since it can fairly allocate the expense burden of public services and providestable tax revenue.

While the public must inevitably shoulder a larger burden to restore public finances and maintain thesocial security system, a minimal level of economic growth will still be essential for achieving thesepolicy objectives. This lends strength to the argument that any increase in the public’s tax burden mustbe weighed against the effect on economic activity.

This argument is presented in the Keidanren’s tax reform proposal in September 2000 (“Fiscal 2001Tax Reform Proposal - For Building a Vigorous Economy and Society”). It contains specific proposalsto reform the corporate tax (such as introducing consolidated tax payment), income tax (a sweepingtax cut), and tax measures related to finance and securities. The main reform proposal for finance andsecurities calls for the complete elimination of double taxation of dividends for both corporations andindividuals.

The double taxation problem was addressed within the LDP in March as an area for securities taxreform to invigorate the ailing stock market. However, since a higher priority was given to helpingindividual stockholders - such as cutting the tax rate for the self-assessed separate taxation fromother income from 26 to 20 percent - the double taxation problem was largely ignored.

In this paper, we describe the double taxation problem affecting life insurers and other corporations,and present pertinent information to advance the debate on medium-term corporate tax reform.

Akira Komatsubara

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