Reform of the Japanese tax system was undertaken after the second World War and was greatly influenced by Carl Shoup, then Professor at Columbia University. Shoup’s recommendations were made during a unique historical period which allowed for an experimental designing of tax reform in Japan to occur under occupation. In this article we review and criticize Shoup’s recommendations and explain the problems inherent in their implementation. Cultural transference problems such as attempted imputation of corporate tax to individual income tax based on the theory of net asset increases tax are discussed. Comparisons are also made with French and German imputation credit methods.
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References
1.
Harold Moss’s title; reference, in the preface of ‘Report on Japanese Taxation’ by the Shoup Mission (1949); ‘report on interviews with Mr. Harold Moss, Edmond Hutchinson and Thelma Bettel’ included in Edited by the Ministry of Finance, Bureau of Financial History, Financial History News, Special Issue 30 (May 8th, 1975 on the cover).
2.
Reference, edited by the Ministry of Finance, Bureau of Financial History, Financial History News Special Issue 30 (1975), Page 2, ShoupCarl S.SulleyStanley S.‘Shoup Recommendations—Progress and Purpose of Establishment—’Finance, 8(9), (December1972), 52 (Professor Shoup’s Lecture).
3.
‘Hearing on Carl Shoup—June 29th 1971, at Columbia University—(Memo)’ included in; Edited by the Ministry of Finance, Bureau of Financial History, Financial History News, Special Issue 10 (July 4th, 1973) page 2; same context, ShoupCarl S.SulleyStanley S.‘Shoup Recommendations—Progress and Purpose of Establishment’Finance, 8(9), (1972), 52.
4.
Edited by Ministry of Finance, Bureau of Financial History, Financial History News, Special Issue 10 (1973), 3.
5.
In regard to the corporate taxation system, ‘The concept of Shoup’s recommendations under which Shoup attempted to impute corporate tax to individual income tax based on the theory of the net asset increases tax and corporate fiction theory are different from actual U.S. taxation system.’ Japanese Finance by TakehisaHayashiKeimeiKaizuka (1973) Page 257–258 (written by Fujita Sei). Opposite theory, Taxation and Collection Issues since 1947 by Hirata Keiichiro (June 27th, 1952). Included in Material of Statement on Post-War History of Finance, Vol. 3; Taxation4’ Page 11–12, Included in ‘Outline of Professor Stanley S. Surrey’s Lecture’: Edited by the Ministry of Finance, Bureau of Financial History, Financial History News Issue 40 (October 13th, 1972), Page 3, ShoupCarl S.SurreyStanley S.‘Shoup Recommendations—Progress and Purpose of Establishment’Finance, 8(9), (1972), 54 (Professor Surrey’s lecture).
6.
Ministry of Finance, Bureau of Financial History, History of Finance News Special Issue 10 (1973) Page 2. Refer, Showa Financial History, 7 (1977), 435 edited by the Ministry of Finance, Bureau of Financial History.
7.
Ministry of Finance, Bureau of Financial History, Financial History News Special Issue 10 (1973) Page 2. Progress and results of the mission members, refer, Investigation Bureau ‘Progress and Future Activities of Shoup Mission Members,’ Taxation accounting Vol. 2 Issue 6 Page 29, Page 31 and pages following, Ministry of Finance, Bureau of Financial History Showa Financial History, 7 (1977), 437–440.
8.
In regard to the title of John R. Allison, refer, ‘Reports on Interviews with Authorities of Occupation of Japan (the fifth)’ included: Ministry of Finance, Bureau of Financial History, Financial History News, Special Issue 18 (January 11th, 1974), 1.
9.
John AllisonR.‘Memoir of Financial Administration during Occupation Period’Financial History News Special Issue 18 Page 3–4. Ministry of Finance, Tax Bureau ‘Outline of Lectures by Professor Shoup, Professor Surrey’ (Material for the department) Page 4 (Professor Surrey’s Lecture). The latter is taken from page 239 of ‘Post-War Reform 7 Economic Reforms’ by Tokyo University Social Science Institute.
10.
Reference included in ‘Main Points Concerning Taxation Reform’: Ministry of Finances Tax Bureau ‘Collection of Reference Materials (First Collection) of 7th Diet Taxation Reform’ (1950) Page 1 and the following pages.
11.
For example, reference included in ‘Law of Taxation’ by Kitano Hirohisa: Iwanami Lecture ‘Modern Law 7’ (1966) Page 300 and following pages.
12.
In regard to succession of foreign laws, refer for example to History and Theory of Japanese Laws, (1968), 13 and following, by Kitagawa Zentaro.
13.
In regard to the title of Henry Schavell, reference included in ‘Reports on Interviews with Authorities of Occupation of Japan (The 4th)’: Ministry of Finance, History of Finance Bureau, History of Finance News, Special Issue 17 (1973 on the cover).
14.
In regard to the history of Schavell, refer to Henry Schavell ‘Occupation in Japan and Taxation System’ History of Finance News, Special Issue 17 (1973) Page 29. Although Schavell was an economist, he lacked knowledge and experience in economics of taxation. He came to Japan in March 1946 as a serviceman and got involved in a job involving taxation. He returned to the United States at the end of January 1951 (same as above). Looking at his personal history, in contrast to the Shoup Mission, it seems that he had no intention in experimenting with his theories in Japan during the occupation. Rather, he seems to have been compelled to incorporate Japanese tax experts’ opinions and reforms into the existing taxation system. (Same contents, included in ‘Taxation System and Collection Issue since 1947’ (June 27th, 1952) by Hirata Keiichiro) ‘Materials of Statement on Pre-War History of Finance, 3, Taxation 4’ (1952) (1952) Page 9–10.)
15.
History of Finance of Showa, 7 (1977) Page 193 by Ministry of Finance, Bureau of Financial History.
16.
‘The Japanese Occupation and the Taxation System’ by Henry Schavell, Financial History News, Special Issue 17 (1973) 24.
17.
Schavell made the comment in the following context: ‘He hoped to make the Japanese and U.S. taxation systems more alike.’ (Ministry of Finance, Financial History Bureau Showa Financial History, 7 (1977), 193).
18.
Reference; included in ‘Taxation System and Collection Issues Since 1947’ by KeiichiroHirata‘Material of Statement on Post-War Financial History, 3, Taxation 4 (1952)’, 9–10.
19.
Income Tax Law (July 31st, 1920, Law No. 11) Article 21. Under the regulations, a corporation is considered a taxable entity, thus corporate tax is imposed on corporations. Dividends paid by corporations are taxed as individual income. For example, refer DHC Commentary on Corporate Tax Law (1981), 54 by Takeda Masasuke.
20.
Shoup Mission ‘Report on Japanese Taxation’ (G.H.Q. Standard Edition) September 1949, Japan Federation of Licensed Tax Accountants Associations (Restored Edition) 1979) Standard edition Page 105, Restored edition Page 74.
21.
As William C. Warren (Columbia University, Department of Politics, Professor at Graduate School at that time) was responsible for corporate tax among the members of Shoup Mission (‘Showa Financial History, Vol. 7’ Page 442) by Ministry of Finance, Financial History Bureau), we could have called it the Warren Corporate Tax Concept to be more exact. But, “what we are recommending here is a tax system, not a number of isolated measures having no connection with one another.” (‘Report on Japanese Taxation’ by the Shoup Mission, standard edition preface page 2, restored edition preface page 1). Therefore, we call it the Shoup Corporate Tax Concept in this report.
22.
‘Report on Japanese Taxation’ by Shoup Mission, standard edition page 106.
23.
‘Report on Japanese Taxation’ by Shoup Mission, standard edition page 112.
24.
‘Report on Japanese Taxation’ by Shoup Mission, standard edition page 107, restored edition page 75–76. For the addition of other factors, refer to ‘History of Post-War Taxation System’ by Sato Susumu and Miyajima Hiroshi (1979) page 13 (written by Miyajima), ‘History of Shoup Taxation System’ by TakahashiShiro, Collection of Theories by Tohoku Gakuin University, Economics Issue84 (1980), 59 and following.
25.
With the taxation reform which was affected in July 1948, the tax credit for individual shareholder of 15% in calculating income tax was established. References included in ‘Changes in Post-War Corporate Tax and Income Tax’ by AkisatoChotaroIchimaruKichizae: ‘Material of Statement on Post-War History of Finance, 3, Taxation 11’ (1955) 19–20 (Statement on Ichimaru’s lectures). Here, we would like to note the following points:
26.
— A tax credit for individual shareholder systems was not established under the Shoup Corporate Tax Concept but was already in existence before the Shoup re-commendations.
27.
— As the tax credit is understood as having the same meaning as a tax deduction, which is mentioned below, raising the tax credit rate from 15% to 25% aims, albeit inadequately, to activate the stock market by increasing the hidden dividend subsidy, which is mentioned below.
28.
‘Report on Japanese Taxation’ by Shoup Mission, standard edition page 105.
29.
‘Report on Japanese Taxation’ by Shoup Mission, standard edition page 106. The elimination of the double taxation system is excluded from the view point of its direct aims. (Refer to same standard edition, preface page 2). ‘Lecture, Japanese Finance 2 Taxation and Tax Burden’ by Kinoshita Kazuo (1970) page 99 (written by Furuta Seiji) comments as follows: The Shoup Corporate Tax Concept didn’t even adopt a second best policy of double taxation adjustment such as the method of deduction at source (Gross Up Method). With respect to this point, refer to ‘Report on Japanese Taxation’ by the Shoup Mission, standard edition page 108.
30.
For example, ‘New Modern Public Finance (Second Edition) by Inoue Fumio (1974) page 421, ‘Taxation Structure in Post-War Japan’ by Hayashi Hideo (1968) page 228. In the formulas mentioned in these books, dividend rate is assumed to be 100%. Refer to ‘Characteristics of Corporate Tax and Taxation on Dividend’ by KanekoHiroshiJichiKenkyu (The Study of Public & Local Government), 50(6), (1974), 11.
31.
Although it was pointed out that, “If corporate earnings are not taxed and shareholders are taxed on the dividends, this will mean discriminating against entrepreneurs in favor of corporations.” (‘Report on Japanese Taxation’ by Shoup Mission, standard edition page 106.
32.
‘Report on Japanese Taxation’ by Shoup Mission, standard edition page 109.
33.
Refer to ‘Report on Japanese Taxation’ by Shoup Mission, standard edition page 107, 108.
34.
The reasons why the corporate tax rate was set at 35% under the Shoup Corporate Tax Concept lie in the following two points. From the point of the imputation credit method, foreign shareholders are discriminated against. They, unlike Japanese shareholders, cannot offset against the corporate tax liability (deducted at source of income tax) paid in Japan with income tax imposed in their own countries (in other words, they cannot exercise the tax credit). It was necessary to improve this in order to quickly introduce foreign capital into Japan. To do this, the Shoup Corporate Tax Concept tried to set a low corporate tax rate. Second, the Japanese corporate tax rate had been set at 35% even before that time. (Refer to ‘Report on Japanese Taxation’ by Shoup Mission, standard edition page 97, refer to English version not Japanese version.)
35.
‘French Imputation Credit Method and its Lessons: Tax Credit and Dividend Subsidy Vol. 1) by Kimura Konosuke, Jurist Issue 726 (October 1980), 117 and following pages.
36.
Included in ‘Law of Taxation’ by HirohisaKitano: Iwanami Lecture ‘Modern Law 7’ (1966), 294.
37.
‘Report on Japanese Taxation’ by Shoup Mission, standard edition preface page 2.
38.
Refer to ‘French Imputation Credit Method and its Lessons: Tax Credit and Dividend Subsidy Vol. 1’ by KonosukeKimura, Jurist Issue 726, 117 and following pages, List 1 on page 121 in particular.
39.
Refer to ‘West Germany Imputation Credit Method and its policies: Comprehensive taxation on Dividend Income’ by KonosukeKimura, Jurist Issue 679, December1973), 108 and following, List 1 of page 111 in particular.
40.
Objection, ‘Characteristics of Corporate Tax and Taxation on Dividend’ by HiroshiKaneko, Jichi Kenkyu (The Study of Public & Local Government), 50(6), 17.
41.
Refer to ‘West Germany Imputation Credit Method and its policies: Comprehensive taxation on Dividend Income’ by KonosukeKimura, Jurist Issue 726 page 117 and following, List 1 of page 121 in particular.
42.
Refer to ‘West Germany Imputation Credit Method and its policies: Comprehensive taxation on Dividend Income’ by KonosukeKimura, Jurist Issue 679 page 108 and following, List 1 of page 111 in particular.
43.
For example, ‘Confusion of Current Taxation System and Point of View in its Correction’Shukan Toyo Keizai (Weekly Toyo Economics) Issue 4038 (1977), 78.
44.
‘Report on Japanese Taxation’ by Shoup Mission, standard edition page 106.
45.
Included in ‘Incentive to Finance under the Shoup Corporate Income Tax Concept’ by KimuraKonosuke: Japan Tax Association’ Shoup’s Recommendation and Japanese Tax System’ (1982) Page 81.
46.
Refer to ‘Collection of Related Materials of Tax Committee–Related to Sub-committee on Basic Issues (Vol. 1)’ by Tax Commission (April1965), page 222 and following pages, ‘Analysis with Actual Examples on Corporate Tax Ends’ by FurutaSeijiMitaGakkaishi (Mita Journal of Economics) Vol. 62 Issue 6 (1969) page 551 and following, ‘Short-term Shift of Corporate Tax’ by FujutaSeijiMitaGakkai-shi (Mita Journal of Economics), 63(2), (1970), 148 and following pages.
47.
In regard to the meaning and function of tax credits, refer, ‘West Germany Imputation Credit Method and its policies: Comprehensive taxation on Dividend Income’ by KimuraKonosuke, Jurist Issue 679) page 110 and List I Nr. and II, and the same article in Jurist Issue 726, 124.
48.
‘West Germany Imputation Credit Method and its policies: Comprehensive taxation on Dividend Income’ by KimuraKonosuke, Jurist Issue 726), 124.
49.
‘Characteristics of Corporate Tax and Taxation on Dividend’ by KanekoHiroshi, Jichi Kenkyu (The Study of Public & Local Government), 50(6), 17 indicates that tax credit by shareholders is the preferential tax measure to promote investment in shares. The mechanism is as stated in the report.
50.
This ‘Tax Credit by Shareholders’ system gives preferential treatment to shareholders. It works especially well to alleviate the tax burden on high income earners who receive large dividends. ‘Development of Post-War Japanese Capitalism and Taxation System’ by KitanoHirohisa, Ho ritsu-Jiho (Legal Current Affairs), 39(10), (1967), 6. The reason is that taxable income which comes under progressive rate does not have a dividend subsidy added (tax credit).
51.
Refer to ‘Mechanism of Transparency System’ by KimuraKonosuke, Hogaku Kenkyu (Journal of Law, Politics and Sociology), 54(9), (1981), 1625.
52.
Same context, ‘Japanese Finance’ by HayashiTakehisaKaizukaKeimei (1973), 256 (written by Fujita Sei).
53.
‘Japanese Finance’ by HayashiTakehisaKaizukaKeimei’ Page 246 (written by HiroshiMiyajima), refer, ‘Review on Shoup Recommendation’ by MiyajimaHiroshiKeizaiHyoron (Economic Review), 21(4), (1972), 191.
54.
Objection, ‘Post-War Reform 7 Economic Reforms’ by Tokyo University Social Science Institute (1974), 244 and the following pages (written by Hayashi Takehisa).
55.
‘Japanese Finance’ by HayashiTakehisaKaizukaKeimei Page 257 (written by Fujita Sei).
56.
‘Report on Japanese Taxation’ by Shoup Mission, standard edition page 100, restored edition page 71. Same context, ‘Shoup Recommendation and Issue of Accumulation of Capital’ by SuzukiTakeo, Keizai Gaku Ronshu (Collection of Economic Theories), 19(6–7), (1950), 20. Also refer to documents mentioned in (57).
57.
Income Tax Law (February 1899, Law No. 17) Regulations of Article 4 Clause 2 indicates the introduction of corporate exclusion of dividends received.
58.
A corporation received tax credit is therefore considered a measure to foster formation of companies (Refer to ‘Characteristics of Corporate Tax and Taxation on Dividend’ by KanekoHiroshi, Jichi Kenkyu (The Study of Public & Local Government), 50(6), 19).
59.
‘General Study on Shoup Recommendation–Record of First meeting–’ by Japan Taxation Research Association (1950) page 49 (written by Suzuki Takeo) describes the features of the Shoup accumulation method as follows: “Forcing savings through accumulation of tax on low income earners is considered necessary. On the other hand, for high income earners, voluntary saving is planned by alleviating the tax burden and having the freed purchasing power directed at accumulation of capital.” Same context, ‘Shoup Recommendation and Issue of Accumulation of Capital’ by SuzukiTakeo, Keizai Gaku Ronshu (Collection of Economic Theories), 19, Issue 6–7 (1956) Page 24, ‘Modern History of Japanese Finance’ by SuzukiTakeo, 3 (1960), 290–291.
60.
In accordance with ‘Changes in the Proportion of Shares Held by Shareholders’ included in ‘Survey on Implementation of Stock-Participation Schemes for the Employees’ by Japan Securities Transactions Council (1979, the rate of individual shareholdings was 61.3% in 1950. However, it gradually decreased since then. It was below 50% in 1958, down to close to 30% in 1978 and about 10% in 1992.
