Subcommittee on Local Autonomy (Third Meeting)

Thursday, May 9, 2002

Meeting Agenda

Matters concerning local autonomy

After a statement was heard from Prof. JINNO Naohiko concerning the above matters, questions were put to him; this was followed by discussion among the members.

Informant

Members who put questions to Prof. JINNO

Main points of Prof. JINNO's statement

Introduction

>> As the background to the current importance of decentralization as a policy issue, we can identify two waves or historic trends that have combined to produce the present momentum toward decentralization: (1) the wave of democracy, a course which Japan has pursued for many years; and (2) the wave of decentralization which arose in the developed nations in the latter half of the twentieth century.

1. Lessons from the past

(a) Taisho Democracy and the movement for transfer of the "two taxes"
>> In the early 1920s, when local government finances collapsed due to a steep inflationary spiral dating from the rice riots of 1918, as a means of fiscal adjustment, municipalities campaigned for an increase in the national government's share of compulsory education expenses, together with transfer of the "two taxes" (land tax and business tax) to local governments. The Taisho Democracy movement, which supported these demands, led to Japan's first national elections under universal manhood suffrage in 1928. As the election posters of the Seiyukai party show, decentralization was an important issue.

(b) The lessons of the Shoup Report
>> The postwar Shoup Report made several recommendations on the allocation of administrative tasks. These included the principle of subsidiarity (tasks should be handled primarily by the municipalities; when that is not possible, they should be handled by the prefectural governments and the national government) and the principle of efficiency (administrative tasks should be allocated to the agency that can execute them most efficiently). With regard to the distribution of taxes and financial resources, the Shoup Report recommended transfer of the two taxes to local governments; this resulted in the fixed asset tax and the enterprise tax being established as independent local taxes. Further, it recommended reorganizing subsidies and introducing equalization grants as a system of fiscal adjustment to correct the gaps in fiscal strength among local governments.

2. Globalization and localization

>> Since the mid-twentieth century, on the one hand there has been increasing economic globalization, while on the other hand there has been a growing trend toward giving decision-making powers to local governments (localization).

>> The European Charter of Local Self-Government (1985) declares the principle of subsidiarity and calls for (i) clarification of the relationship between benefits and burdens; (ii) active democracy; (iii) appropriate policy-making by local governments; (iv) the principle of adequate autonomous financial resources supplemented by a system of financial equalization to enhance local autonomy. In addition, there is now a movement, led by the United Nations, to create a World Charter of Local Self-Government similar to the European Charter.

3. Decentralization of financial relationships among governments

(a) Vertical and horizontal financial equalization
>> Two kinds of adjustment of local public finances are needed: (i) "vertical financial equalization," i.e., adjustment of the way in which administrative tasks and the power to levy taxes are allocated between the state and local governments; (ii) "horizontal financial equalization," i.e., adjustment among local governments.

>> The allocation of many administrative tasks to local authorities through vertical financial equalization will lead to greater decentralization. However, it will also lead to a need to adjust disparities in financial strength among local governments, and hence to an increasing need for horizontal financial equalization.

(b) Correcting two mismatches in vertical financial relationships
>> Even if many administrative tasks are allocated to local governments, this will not have a decentralizing effect: (i) if the state retains the right of decision, resulting in a mismatch between decision-making and expenditure (execution); or (ii) if the allocation of administrative tasks is not accompanied by allocation of the right to levy taxes, resulting in a mismatch between administrative responsibilities and the power to levy taxes.

(c) From a centralized to a decentralized dispersion system
>> I believe that it is important to shift the relationship between the state and local governments in Japan from the present "centralized dispersion system," in which local authorities handle many administrative duties without having the right to levy taxes or the right of decision, to a "decentralized dispersion system," in which local authorities have rights of taxation and decision-making.

>> The recent abolition of state-to-agency delegated tasks by the Comprehensive Decentralization Law has had some success in eliminating the mismatch between decision-making and expenditure (execution), but there is still a mismatch between administrative responsibilities and the right to levy taxes. To eliminate this, I believe that two key taxes, the individual income tax and the consumption tax, should be transferred to local governments. With regard to the method of transferring the taxation of income, the local tax (resident tax) is presently a progressive tax like the national tax (income tax), but it would be possible, for example, to make the resident tax a proportionate tax of 10 percent and combine it with the income tax, which would remain a national tax assessed at progressive rates.

>> What local governments need to do at this time is to improve three types of service: welfare, health care, and education. A "social safety net" is not enough. In my view, we will not be able to break out of the current recession unless we create a "social trampoline" which not only provides safety but also enables people to take on challenges.

(d) Final report of the Committee for the Promotion of Decentralization
>> The final report of the Committee for the Promotion of Decentralization touched on the question of how "the principle of local autonomy" can be realized concretely. I believe that clarifying the proper form of taxation and fiscal resources will lead to clarification of "the principle of local autonomy."

Main points of questions and comments to Prof. JINNO

ITO Kosuke (Liberal Democratic Party)

>> I believe that we should allow local governments to exercise the right of autonomous taxation based on their own original ideas, such as the "bank tax" that the Tokyo Metropolitan Government attempted to introduce (consisting of an enterprise tax on banks, levied on gross profits adjusted for such "external standards" as the number of employees, capital, and other measures of the scale of operations). From this viewpoint, I am concerned that the Tokyo District Court's recent decision invalidating the "bank tax" on the grounds that it violates the Local Tax Law will put a damper on autonomous efforts by local bodies. What is your view of this?

>> Even if we take just the major nations, there is a great variation in their state-to-local-government ratios for both expenditures and revenue, and their taxation systems also vary due to differences in their systems of government. The merits of various systems of governance are currently being debated in Japan, with particular reference to the introduction of a "do-shu" system. In this context, what do you think is the most desirable tax system?

>> If local bodies were granted the right of autonomous taxation, some would inevitably be poor in financial resources. What should be done to eliminate such financial disparities among local authorities?


NAGAI Eiji (Democratic Party of Japan and Club of Independents)

>> The lack of ethics revealed by various recent problems in Japan, such as political scandals, unethical practices in industry, and the breakdown of classroom behavior, has its roots in the fact that people in this centralized society have lost their spirit of autonomy; they have become dependent. It is essential to promote decentralization if we are to solve these problems. What system of government is desirable in promoting decentralization? Also, how do you view the proposed introduction of a "do-shu" system?

>> Germany has a "common tax" system, in which the federal government, the states, and the municipalities jointly collect and distribute income tax, corporate tax, and value-added tax. Would it be possible to introduce such a system in Japan?


EDA Yasuyuki (New Komeito)

>> I heard that in the discussions of the Committee for the Promotion of Decentralization, it was argued that if we were to transfer 5 percent of the income tax to the resident tax and add 1 percent of the consumption tax to the existing local consumption tax, it would change the ratio of national to local tax revenues from the present 6:4 to 5:5. What do you think of this proposal? Also, I believe that such a taxation system would have to be phased in, but how should this be done?


TAKEYAMA Yuriko (Liberal Party)

>> You stated that decentralization is a long-standing issue in Japan, going back to the late 1920s. What is the reason for the lack of progress in decentralization reforms over such a long period?

>> In promoting decentralization, I understand that it is essential to establish autonomous revenue sources. To what sources do you think local governments should turn for their revenue?

>> What country would you cite as a model for Japan in promoting decentralization?


HARUNA Naoaki (Japanese Communist Party)

>> What do you think is the historical significance of the fact that a chapter on local self-government was first established in the present Constitution of Japan.

>> What do you think is the reason that the intent of the Shoup Report's recommendations, which included the abolition of national treasury disbursements and state-to-agency delegated tasks, has not been realized up to now?

>> The local allocation tax offsets the fiscal shortfalls of local governments, and yet its reduction is the major goal of the administrative and fiscal reforms now being promoted, and these reforms are negative toward the transfer of financial resources. What is your view of this?

>> In the "Bill to Respond to Armed Attacks" which forms part of the proposed set of emergency response laws, there are provisions that authorize the Prime Minister to seek the cooperation of local governments and issue directions to them, but do you not agree that this is problematic in terms of local autonomy?


KANEKO Tetsuo (Social Democratic Party)

>> The government is currently promoting municipal mergers using a system of preferential fiscal treatment as an incentive, but these moves are not accompanied by efforts to solve the problem of local public finances at a fundamental level by such means as transferring taxes and financial resources. Do you not agree that such moves run counter to the trend toward decentralization?

>> In "depopulated areas," which have small populations that increasingly consist of elderly people with declining incomes, many of the municipalities are unable to strengthen their finances even if they merge. What steps, including financial equalization measures, should be taken with regard to such areas?


INOUE Kiichi (New Conservative Party)

>> Transferring taxes and revenue sources to local governments will lead to disparities in their fiscal strength. Would it not therefore be better to establish a method in which the central government collects taxes and other revenues uniformly and distributes them to local bodies mechanically, with no discretionary latitude? Also, I believe that it is better to vest the right to collect taxes in a single entity. What is your view of this?

>> In the local allocation tax system, what is your evaluation of the current method of determining the amounts of special allocation tax?


MORIOKA Masahiro (Liberal Democratic Party)

>> Supposing we were to enact a new Constitution, what provisions do you think we should establish with regard to local autonomy? Should we include provisions on the nature of local government taxation and revenue sources?

>> From your standpoint as a member of various government advisory councils, how do you assess the progress of the "Koizumi reforms," particularly in relation to the debate in the Council on Economic and Fiscal Policy?

>> Critics of the existing local allocation tax system say that it hinders self-help efforts by local bodies. What reforms are needed to address this criticism?

>> Setting aside the question of future institutional reforms, in the interim, are there any concrete measures that would enable local bodies to ride out the fiscal crisis they are experiencing?


TSUTSUI Nobutaka (Democratic Party of Japan and Club of Independents)

>> You say that globalization and localization proceed in unison; could you explain the reason for this? Also, if the role of international institutions increases due to ongoing globalization, while that of local authorities also increases due to ongoing localization, will not "nation-states" have a diminished role?

>> The existing local allocation tax system is structured in such a way that when local bodies, through their own self-help efforts, increase their income from autonomous tax and revenue sources, their share of the local allocation tax decreases. Thus, the system discourages self-help efforts by local bodies. Should we not endeavor to develop a system that will motivate local bodies?


HIRAI Takuya (Liberal Democratic Party)

>> One way to promote the development of regions with their own distinctive character is the policy of establishing "special zones," like the "special economic zone" in Okinawa, that offer preferential economic measures and less regulation compared to other regions. How do you evaluate this idea?

>> Your view that it should be up to residents to decide whether or not to merge municipalities can be taken to mean that municipal mergers are not necessarily essential to decentralization. Do you agree with this interpretation?

>> As the development of "electronic government" and related IT networks progresses, I believe that the nature of local governments will change greatly. I would like to hear your views in this regard.

Main points of comments by members of the Subcommittee (in order of presentation)

KANEKO Tetsuo (Social Democratic Party)

>> The central government is pressing ahead with municipal mergers on a uniform basis nationwide, for the sole purpose of strengthening the base of public finances. However, we should be promoting local autonomy in a way that respects regional diversity and independence. Also, in the current debate on the emergency response laws, the central government has not provided sufficient explanation to the local governments, which will be required to cooperate in the event of an emergency. This attitude of the national government demonstrates all too clearly an approach based on the centralization of power.


HARUNA Naoaki (Japanese Communist Party)

>> The guarantee of autonomous revenue sources for local governments is implicit in the "principle of local autonomy" cited in the Constitution. That the Constitution does not provide an explicit guarantee is not a problem in any way.

>> There is a problem of putting the cart before the horse when the central government, following an agenda that puts priority on administrative and fiscal reforms, promotes municipal mergers and reduction of the local allocation tax before taking steps to transfer tax and revenue sources to the local governments.

>> Protecting the lives, safety, and property of citizens is the most important mission of local authorities, and it is they who should exercise the right to make the necessary decisions. But the "Bill to Respond to Armed Attacks" permits the national government to restrict that authority in a situation where no direct danger to citizens has yet materialized, and this is problematic.

NAGAI Eiji (Democratic Party of Japan and Club of Independents)

>> The issue of decentralization was a long-standing area of debate in the postwar period, but the time has come for politicians to be decisive and present a clear "vision of the nation."