Second Thoughts on Value-Added TaxationAuthor(s): M. BronfenbrennerSource: FinanzArchiv / Public Finance Analysis, New Series, Bd. 16, H. 2 (1955/56), pp. 309-312Published by: Mohr Siebeck GmbH & Co. KGStable URL: http://www.jstor.org/stable/40909029 .

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Second Thoughts on Value-Added Taxation by

M. Bronfenbrenner In presenting my present position on value-added taxation, I have been

inspired by the recent contributions of my friend Professor I to in this journal and elsewhere, including his references to my own earlier essay on the sub- ject1. My intention here is not to engage in controversy with Professor Ito, but only to consider in the light of some of his arguments what my own views might be as of 1955, were I again to work in a value-added-tax program. While continuing to advocate the tax for the Japanese prefectures, I should feel compelled to make certain concessions, some to lines of thought presented by Professor Ito, and others to views which may underlie oppo- sition to all measures designed to strengthen the prefectures in Japan.

1. The rationale of value-added taxation was not stated fully in the Shoup Report2. Its advocates have labored under the accusation of favoring it indiscriminately at all times and places, as an exercise in the "minutiae" of national income accounting. In fact the tax is suggested as an alternative to a retail sales tax (once sales taxation is decided upon), where the number of small retailers makes enforcement impossible at the retail level with a limited collection staff. It is a kind of compromise among sales taxes, more enforceable than a retail sales tax under many circumstances, but involving less pyramiding and less advantage to the integrated concern than does a manufacturers' or a turnover tax. Perhaps it is this "lesser evil" status, void of positive advantages except by contrast with alternatives3,

1 Hanya Ito, "The Value-Added Tax in Japan," Annals of the Hitotsubashi Academy (October 1950), reprinted as chapter 2 of Essays in Public Finance (Science Council of Japan, Division of Economics and Commerce, Economic Series No. 3; Tokyo, 1954); ,,Theorie und Technik der Nettoumsatzsteuer in Japan", Finanzarchiv (March 1955). My own work, to which Professor Ito refers, is M . Bron- fenbrenner, "The Japanese Value-Added Sales Tax," National Tax Journal (De- cember 1950).

2 Report on Japanese Taxation by the Shoup Mission (4 vols. Tokyo: SCAP, 1949), vol. ii, ch. 13, sec. A.

3 The alternative adopted in Japan was the extension of a local business income or "enterprise" tax, which the Shoup Mission had proposed to repeal. This is not a sales tax at all, but a business income tax, and leaves the income of the small unincorporated business man subject to triple taxation from the national income tax, the prefectural enterprise tax, and the municipal inhabitants' tax.

The value-added tax was originally proposed as a replacement for two taxes simultaneously, a national turnover or transactions tax and the enterprise tax

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310 M . Bronfenbrenner

which makes the tax difficult to "sell" to the public and to legislative bodies. And to repeat, the tax is not advocated in jurisdictions where a retail sales tax is enforceable and involves no net loss of tax base to outside juris- dictions1.

2. "Value-added" can be computed in two ways. The subtraction method involves the difference between sales to all customers and purchases from other firms. The addition method involves the sum of factor payments to individuals. Profits can and perhaps should be so denned as to make the two values of "value-added" the same, as I stated in my earlier article. They are not ordinarily so defined under conventional book-keeping practice, as Professor Ito points out, so that it makes a practical difference which method is used for computing the value-added tax base. In the contro- versies developing from the Shoup Report, both the SCAP representatives and the Japanese Ministry of Finance advocated the subtraction method, as providing an eventual basis for checking the profit figures presented on individual or corporate income tax returns. Japanese taxpayers, however, favored the addition method, partly to maintain concealment of their skulduggery in other tax returns but primarily to avoid the cost of additional book-keeping. Professor Ito supports them, although for a different reason. His point is that the addition method makes the nature of the tax (business tax) clear to the taxpayers, who have had previous experience with such taxes, while the subtraction method makes the levy look like an income tax which should not apply to enterprises running at a loss. This argument does not appeal to me, but it might well have been expedient, in the early years of the tax, to have yielded on this formal issue and preserved the tax itself.

3. A value-added tax cannot be passed forward into consumer prices so automatically as other sales taxes. What would probably be shifted is some sort of weighted-average "value-added" among firms in an "industry" or in a group of closely-competing industries. This means that some firms can pass on more than the total amount of their tax, while others must bear part of the tax themselves. It was expected to work out so that more "modern" or "rational" firms, heavily capital-using, might deduct capital acquisition or depreciation costs from the value-added tax base, and perhaps pass on somewhat more than they themselves paid. Heavily labor-using firms, on the other hand, would probably bear part of the tax themselves, in default of "acquisition cost" or "depreciation" deductions for human labor.

The incidence problem is particularly serious in Japan for privately- owned public utilities, particularly railroads, shipping lines, and warehouses.

mentioned immediately above. As a replacement for both these taxes, it would have stood a good chance of passage. But through a strategic error, the transactions tax had already been repealed before the value-added tax proposal came before the Diet, so that the latter was debated only against an enterprise-tax alternative.

1 The State of Michigan attempted value-added taxation as a supplement to retail sales taxation because an unusually large proportion of Michigan economic activity terminates in retail sales outside the State. Michigan is a food-processing, furniture-making, and automobile-manufacturing center for the entire United States.

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Second Thoughts on Value-Added Taxation 311

Value-added represents, for these industries, a higher than average percen- tage of gross sales. The utilities are subject to rate regulation, which may delay or even forbid shifting of the tax. Furthermore, the railroads and shipping lines compete with publicly-owned railroads and shipping lines exempt from local taxation. The warehouses compete with the farmers' own warehouses, and with services supplied to farmers by farm co-operatives on a non-business basis. The private utilities and the trade unions of their employees (which in this controversy were "labor auxiliaries" of their employers) felt unable to shift value-added taxes at all. In this they were probably substantially correct, at least in the first years of the tax. They demanded special treatment. Failure to secure it led to the shrewd campaign to postpone the tax year after year until the Occupation ended, and then kill it altogether in 1953. Hindsight, plus an ingenious relief provision in the Michigan law, suggests the wisdom of including in value-added tax plans some ceiling on "value-added" as a percentage of the taxpayer's gross sales, which would prevent any firm from being taxed on more than this percentage of its gross, whatever the correct calculations indicate.

4. The year 1949 and the first half of 1950 saw an abrupt halt in the postwar Japanese inflation, and accordingly led to heavy losses among business men who had accumulated inventories or otherwise speculated on continued upward spiralling of prices. Among the elements of relief which these "loss concerns" had anticipated for 1950 was the elimination of local enterprise-tax obligations. The value-added tax, while permitting a loss deduction, would have left these concerns with substantial liabilities based on factor payments to individuals. As a transition policy without a logical basis, it might have been judicious to include a double-rate system for partial relief to these "loss concerns," as for example by levying a higher percentage rate on the profit element than on payments to other factors of production.

After the outbreak of the Korean war, Japanese business revived and there was a second spurt of inflation. At the rates proposed during 1949-50, the value-added tax would have brought in considerably more revenue than the enterprise tax which it replaced, and accordingly levied a heavier burden on taxpayers. It is possible that a lowering of the proposed rate in 1951 or 1952 might have induced passage rather than postponement of the value- added tax in one of those two years.

5. A special circumstance operated against value-added taxation in Japan which should not operate against it generally. The tax was proposed as a means to strengthen the Japanese prefectures. These are 46 in number, and stand between the municipalities and the national government in somewhat the same way as the American States and the German "Lander." The problem is that the financial strengthening of these prefectures is looked on as secondary to a decision regarding the future of the prefectures them- selves. Many Japanese view them as quite unnecessary except perhaps as administrative districts. There are movements for their abolition and con- solidation in the interests of economy and efficiency, as well as for returning them to their pre-war status as Central Government organs without auto- nomy or self-determination, not differing essentially from the French "de-

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312 M, Bronfenbrenner : Second Thoughts on Value-Added Taxation

partements." In this connection it should perhaps be mentioned also that a movement for consolidation of the Japanese "municipalities" (cities, towns, and villages) has been quite successful, cutting down the number by approx- imately one-third in the first three years after independence.

The prefectures are of small size, comparable to one or two large American counties in area. Their boundaries generally correspond to those of former feudal clans. The feudal clans maintained for centuries a high degree of economic self-sufficiency, which their prefectural successors lost completely in less than 100 years. Perhaps as a partial consequence, the focus of local pride has shifted away from the prefecture, and now fluctuates between municipalities, which are smaller, and whole regions, like Kansai or Kyushu, which comprise several prefectures. It would hardly have been possible under these circumstances to arouse widespread popular support for any system of prefectural tax reform which left the prefectures them- selves unchanged. The Shoup Mission was neither competent nor empowered to change the prefectural system. The value-added tax was to some extent an accidental victim of this impotence, the particular element in the Shoup reform program which fell by the wayside as its result. Leaving the problem of the prefectures unsolved, it generated no public enthusiasm and was an easy victim for special interest groups which preferred the status quo.

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