Table Speech

How to Finance Reconstruction from the Earthquake?

September 14, 2011

Mr. Shigeki Morinobu
Professor of Chuo Law School

 No agreement is reached yet on how to finance reconstruction from the Great East Japan Earthquake, despite all the new information we get on a daily basis. The Basic Act on Great East Japan Earthquake Reconstruction was enacted on June 24th. It clarified that the government would reduce its expenditures, sell state-owned properties, and issue reconstruction bonds with shorter term of redemption in order to secure sufficient finances. In short, reconstruction would be funded by a temporary tax increase.

 Just a month ago, reconstruction expenses were estimated to total 19 trillion yen for the coming five years, of which 6 trillion yen would be secured by the first and second supplementary budgets and 3 trillion yen through expenditure reduction etc. The remaining 10 trillion yen was at stake. Today, various arguments have risen to finance other measures totally unconnected with the Earthquake through reconstruction taxes or bonds. The frustrating picture we have is that expenditure is ballooning, while the government dithers. Right after the Earthquake, the opinion poll revealed that as many as 70-80% of the Japanese accepted the inevitable tax increase, given the scale of the disaster. I am concerned that postponing the decision-making could discourage people from accepting tax increases.

 I personally believe financial resources for reconstruction should be borne by the current generation in solidarity. The three basic taxes (income tax, corporate tax and consumption tax) could be the source of finances. Let me clarify each of their advantage and disadvantage.

 First, on income tax, a progressive surtax proportionate to income level could be introduced. Surtax added to withholding tax is easier to implement as it avoids troublesome clerical work. Its disadvantage is that high tax payment could erode the morale of the workforce. Also, the current defective collection rate of income tax by the tax authority could foster inequality.

 Secondly, on consumption tax, its prime advantage is securing financial resources in a short period. Additional 1% of consumption tax can raise 2.5 trillion yen. Yet, such regressive tax could adversely affect earthquake survivors or people in the lower income bracket. It is imperative to come up with tax refund measures for them.

 Lastly, on corporate tax, the previous Kan cabinet reached an agreement on corporate tax reduction by 5% worth 800 billion yen after an extensive debate. It aimed to curb overseas transfer of Japanese corporations and to ensure job security. An abrupt “earthquake surtax” will disrupt the whole business. Feasible measures include either reducing corporate tax by 5% and then introducing the 10% surtax or suspending tax reduction for the coming 3-5 years.

 Germany and Australia have revised their tax laws and we can draw some lessons. I was deeply impressed when East and West Germany were reunified, the then Chancellor Kohl declared that the German people would shoulder the cost of reunification, their long-cherished wish, and Germany does not seek assistance from other countries. When the Berlin Wall collapsed, the economic power of West Germany was 6 times larger than that of East Germany.

 Chancellor Kohl made a bold political decision to exchange the East German marks to Deutsche marks at the rate of 1:1. People in West Germany shouldered a great burden. What was more, 7.5% of solidarity surcharge has been imposed on corporate tax and income tax since July 1991, as a measure to assist East Germany, which generated the equivalent of 2 trillion yen.

 The Australian government made a quick response to rebuild the flood-affected Queensland and imposed the temporary “flood levy” this March. In her famous speech, Prime Minister Julia Gillard called upon her people to collaborate in rebuilding Queensland through additional taxation, equivalent to giving up 1 cup of coffee a week, while the government would do its best to secure funds for its reconstruction.

 In Japan, surtax imposed on income tax seems to be the most realistic option. Taking an example of an average family with two children with an annual income of 7 million yen, the current income tax is about 170,000 yen. 5% surtax equals to less than 10,000 yen a year, which will pay by sacrificing 1 cup of coffee a week. I do believe the Japanese people are ready to accept this, should the new Prime Minister Noda give a persuasive and clear explanation. Devastating damages of the Earthquake have made us feel the need to share the burden of reconstruction, directly or indirectly, among the current generation. The government is urged to make a prompt decision that takes in such sentiments.

 Before closing, let me share my view on the different form of “tsunami” that is striking our country mercilessly in the time of national disaster. Right after the Earthquake, the stock prices plunged, but the yen soared and marked the record high. The Japanese government must implement effective economic and tax policies to guard ourselves against the international speculative money, which is surging in just like “tsunami.” Time has come for us to take a firm stand and show our determination to achieve reconstruction by the current generation.