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1. Argument and analytical framework 2. Policy-making process of tax system reform （during the 1955 regime） 3. From “political reform” to “Koizumi structural Dr. Masato Kamikubo reform” (1990s~2005） Associate Professor, 4. LDP’s tax system reform (2006~2009） Graduate School of Policy Science, 5. DPJ’s tax system reform (2009~） Ritsumeikan University 6. Can the DPJ finally raise ’s ?

(2) Analytical Framework: (1) Argument: ・Institutional Changes ・The Ministry of Finance (MOF) has nurtured 1) During the 1955 regime (before the “political reform” in politicians in both ruling and opposition parties who 1993) can develop a policy of fiscal reconstruction and a. Political corruption and pork-barrel politics b. Policy-making process realise tax increases ① Strong Policy Research Council (PRC) and weak Cabinet ・It is highly possible that an increase ② Political bargaining behind the scenes in consumption tax will be finally ③ Factionalism realised ④ Seniority system and hereditary politics

2) Political Reform (1993): 3) Change of policy-making process ・Electoral reform: Introduction of the single-seat constituency a. Weakening of factions and PRC system → Strengthening of Cabinet Office 1) Merger of small political parties b. Pork-barrel politics From multi-party system to two party system → Policy-oriented politics 2) Strengthening of Prime Minister and party executives a. Power to shuffle personnel c. Collapse of seniority system b. Power to dissolve the lower house → New policy experts emerged c. Power of resource distribution (3) Policy-making process of tax system reform: ・ LDP Research Commission on the Tax System (RCTS) → Ministry of Finance (MOF) and policy experts

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(4) Actors concerned in tax system reform: 3) New Party Sakigake and “New Emerged in Ministry of Finance reform in 1990s Breed Policy Maker”: 1) “Fiscal Hawks”: , , Sadakazu ① , Yoshito Sengoku, Fumihiko Igarashi, Tanigaki, , , Promoting “Fiscal Structural → Resisting “MOF reform”

2) LDP’s “new breed policy maker”: , Yoshimi Watanabe, Nobuteru Ishihara ② Pursue dismantling of MOF → Pursuing administrative reform → DPJ change to cooperate with MOF Show reluctance to raise tax which MOF promoted

4) Ozawa group: (1) Policy-making process in LDP Research Commission on the Ichiro Ozawa, , , and “Ozawa Tax System (RCTS) Children” ・Judging “Petition for Tax Reform” which collects industry → Ultimately, pursue dismantling of MOF demands (so-called “denwa-cho” or phone book) → Coordinate conflicting interests between industries ・Small number of tax experts (so-called “inner”) substantively make decisions 1) Pride themselves on taxation expertise 5) Former-LDP veterans and Former-Socialist Party group: 2) Exclude amateurs from policy-making Have unexpectedly strong relationship with MOF ・“Boss of RCTS” Sadanori Yamanaka e.g. , Naoki Minezaki “Government Tax Research Commission is not downgraded, but ignored”

・Tax reform as hodgepodge of industry demands (1) Why did politicians force through “Political Reform”? （Even Koizumi government could not realise drastic reform of ・Reformist politicians recognised the limits of zoku-giin tax system) politics (politics of political tribe) ・1990 process of introduction of Consumption Tax ・Increase policy issues in which it is necessary to 1) Conventionally MOF seemed to lead the reform coordinate between ministries and agencies 2) In reality PM Takeshita exerted high coordination ability e.g. US-Japan trade friction → Overcome industry opposition Japan’s negotiator: Ichiro Ozawa a. Takeshita contacted 300 industries on RCTS to hear their (Vice-) demands → Significant for “Political Reform” b. Problems: e.g. “Simple Taxation System” 1. Made strong connections between Give special consideration to supporters such as bureaucracy and industry farmers and self-employed workers 2. Keenly realised limits of zoku- → Increased public distrust of consumption tax giin politics

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(2) Realisation of “Political Reform”: (4) MOF organisational reform in Hashimoto government: Introduction of combination of single-seat constituencies and ・Financial Big Bang, Separation of Financial Bureaus proportional representation (1993) New breed policy makers (3) “MOF organisational reform” was the main subject of versus pro-MOF politicians administrative reform in the 1990s ・New Party Sakigake (predecessor of DPJ) advocated “MOF should be divided into four agencies” ・Fiscal Structural Reform 1. Separation of financial section (Financial Services Pro-MOF politicians and Budget Bureau in Agency) MOF 2. Merger of National Tax Agency and Social InsuranceAgency (Revenue Agency) → In 1998 reform failed because LDP 3. Separation of Budget Bureau (Budget Agency) suffered a humiliating election setback 4. National property management

(5) Koizumi Structural Reform: (1) Prime Minister Koizumi lifted a ban on discussing ・Koizumi government created a close relationship with MOF increases in consumption tax in order to promote structural reform ・ In 2006 Yosano became minister in charge of economic ・Koizumi stated “Consumption tax rate would not be and fiscal policy increased during my terms of office” ・ Yosano and Yanagisawa, chairman of RCTS in the LDP, → Tax system was not reformed proposed tax system reform through “the reform of both expenditure and revenue” , chairman of PRC in the LDP, planned for massive spending cuts

Cuts in spending by 2.2~5.1 trillion yen (1~2% increase in tax is necessary)

(2) Fukuda government: ・ “Yanagisawa’s Paper” ・Consumption tax rate would be raised to 10% Rise in consumption tax to be used for in the mid-2010s social security costs such as pensions, → The government calculated that a tax medical services and nursing care increase to 10% would meet expansion of social security costs “Tax for social security” was first (3) Aso government: advocated in a formal government ・The concept of “medium-size welfare, document medium-size national burden” was advocated

→ Yanagisawa persuaded MOF to accept Yanagisawa’s idea. (4) Change of RCTS in LDP From initiative of zoku-giin (taxation experts) to initiative of MOF and new policy experts

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(1) Restructuring Government Research Commission on Tax ・ “Committee of Eleven Tax Experts” is established System (RCTS): ・Excluding RCTS in LDP from policy-making process 1) Provide expert advice to RCTS 2) Four experts are former members of government RCTS ・Membership: during LDP regime 1) Chairman: Finance Minister → Securing continuity of tax system reform between LDP 2) Vice Chairman: Vice Minister of Finance, Vice Minister of and DPJ regimes Internal Affairs 3) Committee members: other Vice Ministers (2) Abolition of RCTS in DPJ → Blocking DPJ zoku-giin tax experts who represent ⇔ In LDP regime: advisory council of academics, interests of a particular industry industry representatives

(3) Relationship between MOF and DPJ regime: (3) Integrated reform of social security and tax: ・Finance Minister Fujii, Vice Finance Minister Minezaki ・Objective: 1) Close relationship with MOF before regime change 1) Japan enters “aging society with a falling 2) Argue necessity of consumption tax increase for social birthrate” security → Similar to Yosano and Yanagisawa in LDP 2) Control rise in social security costs 3) Secure revenue sources ・MOF and DPJ shared views on direction of tax system reform when Hatoyama government was formed in September 2009 → Necessity to implement both tax and social security system reform is widely recognised

・Tax System Reform: ・Cabinet reshuffle in 2011: 1) Increase consumption tax from 5% to 10% Prime Minister Naoto Kan appointed Yosano as Minister in by 2015 charge of economic and fiscal policy 2) Consumption tax revenues will only be used for social security costs → DPJ’s reform plan became similar to the plan in LDP ・Incremental reform of social security system → This reform plan is very similar to LDP’s (2009 DPJ election manifesto contained a much more radical social security reform plan but this idea was dropped)

・After Great East Japan Earthquake a few politicians tried to intervene in reform policy-making process

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(1) Prime Minister Yoshihiko Noda faces difficulties: ・Revival of RCTS in DPJ: ・Opposition within DP J– Ozawa Group (100 members) 1) Former Finance Minister Fujii becomes Chairman ・Noda tries to maintain party harmony 2) Make opposition within DPJ participate in discussion on consumption tax increase → Try to achieve consensus within the party 1) Higashi Koshiisi is appointed as Secretary General 2) Vice Ministers and Parliamentary Secretary: ・Reversal to pork-barrel politics as in LDP regime: Young members of Ozawa group are appointed 1) Trade unions and industries lobby for RCTS → These moves are not successful → Claiming opposition to tax increase 2) Fujii retired as Finance Minister because of poor health and is also relatively old

(2) Prime Minister Noda encounters difficulties in managing Diet 2) Radical pension system reform: affairs: a. Three different pension systems for self-employed ・PM Noda requires LDP and opposition parties workers, corporate workers and civil servants to participate in tax system reform discussions → Create unified pension system geared to each → Opposition rejects this individual’s income + guaranteed minimum of ¥70,000 ・Opposition strongly demands withdrawal of “DPJ’s 2009 per month election manifesto” 1) Reduction in number of Diet members: → Difficult for DPJ and opposition to b. Additional consumption tax increase from 10% to 12.3- agree 17.1% is necessary a. DPJ wants to reduce 80 PR seats b. Komeito and other small parties c. Included in DPJ 2009 election manifesto are strongly opposed. ⇔ LDP and Komeito strongly demand it is retracted

3) “Bill to issue deficit-covering bonds”: (3) Japan’s consumption tax can be raised: a. Fiscal 2012 budget: ・Noda government will submit bills related to consumption tax ① 40% of general account expenditure is covered by deficit- hike to Diet in March covering bonds ② Budget of 38.3 trillion yen will not be implemented if the ⇔ LDP and Komeito put pressure on PM Noda to dissolve the bill is not passed through the Diet House of Representatives by the end of March or June ⇔ LDP and Komeito criticise major policies in DPJ 2009 election manifesto: ・Increase in consumption tax will be realised ・ child allowance 1) DPJ and opposition parties strongly argue about the main ・ tuition-free public high schools policies in DPJ 2009 manifesto ・ farmers income support allowance 2) They do not dispute increase in consumption tax itself → Strongly demand their abolition

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・Opposition parties: (4) Uncertainties of realising consumption tax raise: a. LDP: → Ozawa group and “Ishin no Kai” (Meeting of the ① LDP’s original reform plans for tax and social security Restoration)led by Osaka Mayor Toru Hashimoto systems are very similar to DPJ’s a. Majority of members in Ozawa group are young ② LDP pledged increase to 10% consumption tax in 2010 → They are not electorally strong so it is difficult for them to House of Councillors election. LDP will promise to separate from the main party raise consumption tax rate to 10% in their manifesto for → They are not a threat to the Noda government next general election b. If “Ishin no Kai” is ready for next general election b. Komeito declares tax reform is not a point of issue ① Ishin, Ozawa, and other small parties will be able to form a united front against the main parties such as DPJ, LDP, and Komeito, which want an increase in consumption tax ② This may trigger a “political realignment” → However, this is not realistic

(5) Ministry of Finance (MOF): a. Before the 2009 regime change MOF had discussed tax d. It does not matter to MOF which party realises a system reform with the DPJ consumption tax increase b. Regime change is again a possibility → It is natural for MOF to start discussions with the LDP and Komeito. e. If DPJ loses power, LDP and Komeito will LDP executives such as Sadakazu implement a tax rise with the abolition of the main Tanigaki, , and policies in the DPJ manifesto have a long-standing close relationship with MOF

c. MOF has advanced discussion with DPJ, LDP, and Komeito. → Three parties’ policy directions become similar

Thanks for your attention

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