The Problem of the Separation of Agencies Responsible for the Collection of
National Taxes, Local Taxes and Social Security Contributions
- Proposals for Reform Based on a Comparison With Other Countries -
March 01, 2006
The collection of national taxes, local taxes and social security contributions, amounting to ¥126.9 trillion (figures as of fiscal 2003 throughout this article), is handled by a number of different agencies, including the National Tax Administration Agency, local government bodies, the Social Insurance Agency, and the Labour Bureaus, and a review of this situation would lend momentum to the government's drive for "small and efficient government". To date, however, there has been virtually no discussion of this subject in Japan. This article identifies the characteristics of and problems inherent in Japan's collection agencies through a comparison with other countries, and puts forward a number of proposals for reform.
The comparison procedure is as follows. The first step is to examine the degree of separation or overlap between income, consumption, assets and other tax bases for the various functions that make up general government — the central government (or federal government), local government bodies, social security fund administration (and state governments in countries with a federal system of government). The greater the degree of separation, the less likely it is that the tax system or social security system will duplicate the cost of cooperation with tax collection (the cost to the taxpayer in terms of time and money) and tax administration costs will. On the other hand, the greater the degree of overlap, the more likely it is that costs will be duplicated, unless some form of integrated collection across government functions is in operation.
The next step is to examine whether any form of integrated collection is in operation. In Japan, there is considerable overlap among the tax bases for central government, local government bodies and social security funds administration, yet taxes and contributions are collected by a number of different agencies. In particular, the administration of social security funds is handled by several different agencies, including two at national level alone — the Social Insurance Agency and the Labour Bureaus. Moreover, only the local consumption tax (a prefectural tax), which is collected by the National Tax Administration Agency and the Customs and Tariff Bureau and accounts for a mere 1.9% of all tax revenue (¥2.4 trillion), is subject to integrated collection across government functions.
Turning to the six countries chosen for comparison, in Sweden and the United Kingdom, the separation of tax bases is advanced. For instance, there are tax categories peculiar to local government. Moreover, in Sweden, national taxes, local taxes and social security contributions are all collected by the Tax Agency, while in the United Kingdom, national taxes and social security contributions are both collected by HM Revenue and Customs. In recent years, the United Kingdom has integrated its collection agencies, largely with a view to reducing the cost of cooperating with tax collection. In France, although taxes and social security contributions are collected separately, the major local taxes are collected by the central government. In the United States, the tax bases for the various government functions are largely separated and both national taxes and social security contributions (social security tax) are collected by the Internal Revenue Service. Meanwhile, in Canada, a country where there is considerable overlap between tax bases, the federal government has agreements with most of the states, to the effect that state taxes should be collected along with federal taxes, by the Canada Revenue Agency, which also collects social security contributions. In Germany, another country where the overlap between tax bases is greatest, the major taxes are collected by state governments under the title of a "joint tax" and the revenue is shared among the federal government, state governments and local government bodies, while all social security contributions, including not only health insurance contributions but also pension and employment insurance contributions are collected by the Krankenkasse, the organization on which Japan's health insurance associations are modeled. The Krankenkasse is a corporation independent of the government, and draws its funding from occupational mutual benefit associations.
As compared to these six countries, Japan's situation is "unique". In Japan, there is considerable overlap between the tax bases for the various government functions, and although this tends to place an additional cost burden on both the taxpayer and the administrative authorities, there is very little integrated collection of the kind seen in countries such as Germany and Canada. Like Sweden, the United Kingdom, the United States, and Canada, Japan operates social security systems applicable to all citizens, such as the basic pension, but unlike those countries, has not integrated the collection of national taxes and social security contributions. Moreover, social security contributions are collected by the Social Insurance Agency and the Labour Bureaus (both government institutions), in contrast to the situation in Germany, where they are collected by the Krankenkasse. Japan's unique system does not appear to have the taxpayer's interests in mind, nor does it appear to be compatible with the government's goal of "small and efficient government".
The reforms proposed in this article are as follows. At present, the National Tax Administration Agency, local governments, the Social Insurance Agency, and the Labour Bureaus respectively collect ¥41.7 trillion, ¥35.1 trillion, ¥27.8 trillion, and ¥3.6 trillion in taxes and social security contributions. Of these, all taxes and contributions drawn from tax bases on which there is overlap between the various government functions should, as far as possible, be subject to integrated collection by the National Tax Administration Agency. Only the collection of the fixed asset tax and contributions to the national health insurance scheme, where local government bodies themselves are the insurer (operator), should be left in the hands of local government. The Social Insurance Agency and the Labour Bureaus should no longer handle any collection work. This would raise the amount collected by the National Tax Administration Agency to ¥92.5 trillion, equivalent to 72.9% of total tax revenue. These reform proposals may appear bold, but would merely normalize the situation in Japan as compared with other countries. There is an urgent need for discussion in concrete terms.
For more information on the content of this report, please contact Kazuhiko Nishizawa the Japan Research Institute, Limited.