Follow-up on the Hometown Tax Research Committee

August 7, 2007 (Tuesday)

I have twice commented on the implications and research committee of the “hometown tax” in this column. This committee, which I chair, has recently hammered out a somewhat clear direction regarding hometowns and tax payment systems, and I would like to introduce the structure of and reasons behind this.

The committee investigated specific issues and came up with a more concrete direction for the hometown tax system at the July 31 and August 7 meetings. In terms of the direction, there are two main choices: implementing the hometown tax system as a normal tax, and implementing it as a donation tax system. Our study group decided to pursue the latter course.

This is because setting it as a normal tax would be difficult both in theory and in practice, while implementing it as a donation tax system would present few problems and would make it possible to construct a system that is easy to use by citizens.

To establish the hometown tax system as a tax, it is necessary to have an unprecedented and wide interpretation of the “contribution-benefit principle” and the “payment by beneficiary” principle, the fundamental principles of the local government tax system. This is because there is a need to justify paying taxes to local governments even though services from these governments cannot be enjoyed. There is also the problem of tax levying agencies being able to recognize the right to tax people who are not being provided with public services. Furthermore, there is an issue of fairness in that some pay the hometown tax and others do not, even though they receive the same public services. A problem in the implementation system also exists among many local governments where massive administrative costs are required to calculate final tax levies and tax revenue.

In comparison, with the donation tax system contributions to one’s hometown would be received as tax payment. This kind of system already exists in both national and local tax. By expanding the scope, or by further developing the current system by incorporating tax deductions in addition to the existing income deduction, this system has the merit of being able to realize the goals of the hometown tax. Additionally, it is easy to understand, easy to use, and is realistic. From this perspective, the committee chose to set the course for the hometown tax as a donation tax system.

Regarding the implementation of the donation tax system, a majority of the committee agreed that the easy-to-understand tax deductions, with their significant merits, should be used instead of the current income deductions.

However, even if the tax system is constructed in this fashion several issues must be overcome to actually make it into an easy-to-use system. For example, there is the problem of it being possible to force all payers of the hometown tax to file a final tax return. Many salary workers have their companies withhold tax from the source and do not file final tax returns. If hometown tax payers are not required to file final tax returns themselves, however, it may become possible to force companies to process the hometown tax, which is a local government tax. The reality is these kinds of problems remain.

The committee is organizing these issues and working to come up with options for developing a tax system that is both easy to use and understand by the beginning of September.