Allocation of Tax Revenue to Promote Local Government Independence

ABSTRACT

This paper considers tax revenue allocation among the central and local governments from the perspective of ideal frameworks with incentives for local governments to pursue their own economic revitalization.

Regarding the calculation method for the standard financial needs – the existing foundation for deciding tax revenue allocation to local governments – most of the current standard financial needs can be explained by population and area only and without strictly calculating each administrative item. In other words, there is much room for simplifying the current, complex framework. In the future, rules regarding the allocation of tax revenue to local governments should be simplified, and a framework that guarantees minimum per capita tax revenue should be placed as the foundation (for example, tax revenue is allocated to local governments below the average). Following this, rules that cover the difference between the standard financial needs and standard financial revenue should be eliminated, and incentives for local governments to secure tax revenue independently by attracting enterprises and revitalizing industry should be increased.

With maximum efforts by local governments to secure tax revenue as a premise, corporate tax seems more appropriate than consumption tax with regards to local governments maintaining independent tax revenue sources (local tax). The current corporate tax system, however, is a complicated framework in which corporate tax as well as two local corporate taxes (corporate inhabitant tax and corporate enterprise tax) are repeatedly levied. In the future, these should be organized and unified with divided shares between the central and local governments; local government shares, for example, could be divided in proportion with prefectural resident income. In summary, in the event that local governments cannot secure the minimum necessary tax revenue through independent finances such as local shares of corporate tax, tax revenue allocation should be pursued.