894.512/9–349
The Acting Political Adviser in Japan (Sebald) to the Secretary of State
[Received September 12.]
Sir: I have the honor to refer to various despatches regarding the Japanese taxation situation submitted in recent months by this Office, and to report that the Shoup Taxation Mission, which arrived in Japan about four months ago under the auspices of the Department of the Army, has now completed its work.
On August 26, 1949, Dr. Carl S. Shoup, Chairman of the Mission and professor in the School of Business and the Graduate Faculty of Political Science at Columbia University, released a summary of the recommendations drawn up by the Mission. These recommendations, eagerly awaited by the Japanese public and by foreigners resident in Japan, are contained in the enclosed copy of a release issued at a special press conference at Tokyo.1
As indicated in the first paragraph of the release, the recommendations of the Tax Mission cover four general topics including: (1) the total [Page 847] amount of taxation assumed to be necessary for the Japanese 1950–51 fiscal year commencing April 1, 1950, and the proportions to be raised by the national and local governments; (2) the major changes in the structure of the tax system, as, for example, the part of the national total that is recommended to be raised by the personal income tax; (3) the changes to be made within each tax, as, for instance, the way in which members of a co-living family shall be treated under the income tax; and (4) some administrative considerations, such as methods of inducing taxpayers to comply with the law, and of allowing them to appeal against reassessments, and the role, if any, that business associations should be allowed to play in getting the income tax assessed and collected.
The Mission’s final report is now being printed, both in English and Japanese, and an adequate number of copies of the English language version will be transmitted to the Department upon release in about two weeks. As stated in the enclosed summary, the report will present in detail not only the recommendations, but the reasons why they were reached. According to Dr. Shoup, “it is hoped that through the publication of this report an intelligent discussion of the Japanese tax system will develop, in the press, in national and local tax offices throughout the country, in business circles, in women’s organizations, and in the universities and secondary schools.”
In order to give proper emphasis to the Shoup Taxation Mission’s highly significant and sweeping recommendations, an officer of this Mission requested Mr. L. Harold Moss, Chief, Internal Revenue Division, Economic and Scientific Section, General Headquarters, to comment on those recommendations. Mr. Moss, in response to whose request the Taxation Mission was despatched to Japan, considers the following to be among the most significant recommendations made by that Mission:
- 1.
- A much greater degree of fiscal autonomy, including much broader taxation powers, for local governments;
- 2.
- A substantial reduction averaging 30 percent in the existing abnormally high personal income tax rates (with a top bracket of 55 percent), this recommendation being designed to bring about a greater degree of voluntary taxpayer compliance and make effective tax enforcement possible;
- 3.
- Imposition of a “net worth” tax with rates ranging from ½ to 3 percent on individuals with net properties in excess of Yen 5,000,000; this provision is designed to compensate for the reduced income tax rates in the high brackets.
- 4.
- Retention of the normal corporate income tax rate of 35 percent but repeal of the excess profits tax.
- 5.
- Revaluation of assets in order to reflect realistic depreciation charges for tax purposes.
- 6.
- Substantial revision of real estate taxes, with the view to making them more productive and with anticipated revenues of 50 billion yen.
At the August 26 press conference, Dr. Shoup reportedly was questioned by correspondents as to the effect of his recommendations on the position of foreign investors in Japan. According to an American correspondent, Dr. Shoup stated that “there are encouragements for foreign investors to enter Japan although they are general and nondiscriminatory,” and that “we hope all investors, both foreign and domestic, will be encouraged by the recommendations.” Dr. Shoup reportedly listed recommendations which are hoped to remove objections by foreign investors to putting their money into Japanese industry… under the present laws as: (1) repeal of the excess profits taxes for corporations; (2) more liberal treatment of stockholders in regard to taxes on dividends “in view of the fact that corporations already are paying a 35 per cent tax under the recommendations”; (3) revaluation of assets, allowing an increase in the amount of depreciation; and (4) “technical reforms” such as elimination of the 20 per cent withholding tax for aliens residing in Japan.
[Here follows report on Japanese press reaction to the Shoup summary of August 26.]
That General Headquarters’ officials concerned are vitally interested in the Diet’s approval of the Shoup recommendations was reported by an American correspondent in an article published August 28 by the Nippon Times. According to this report, “Allied Headquarters officials want the Japanese Diet to quickly pass the tax reforms recommended by the Shoup Taxation Mission and there may be ‘direct action’ on the part of GHQ if the Japanese are too slow . . . .2 High Allied officials expressed the opinion that the various Japanese political parties would cooperate to see the proper legislation speeded through the legislative branches, but said if they did not, they would be told that such important measures should not be used as ‘political footballs’ at the expense of the people.” The correspondent is quoted as stating that “foreign businessmen are anxiously awaiting Diet action on the recommendations to see what the attitude will be toward taxing foreign firms. Bad tax laws have done much to prevent the flow of large quantities of foreign capital into Japan since the end of the war, although it is badly needed here.”
While the recommendations made by the Shoup Mission have widely been praised, save by the Akahata, official organ of the Japanese Communist Party, as being sound and essentially in Japan’s best interests, some comment upon the work of the Mission itself appears to be in order. In our opinion, the Shoup Mission has been singularly successful, owing in large part to the competent leadership afforded by Dr. Shoup as well as by the high level of assistance given him by the other members of the Mission, by officials of the Internal Revenue [Page 849] Division, Economic and Scientific Section, and by other officials in General Headquarters. Dr. Shoup himself was the subject of widespread and favorable Japanese press comment, special attention being devoted to his great zeal for getting at the crux of the Japanese taxation problem, his unquestioned sense of fairness and ability to solicit and to consider opinions from all strata of Japanese society, and an ability to work in close harmony with Japanese Government officials concerned with the taxation problem. We consider that his work in Japan, which in a large degree serves to supplement the work in the field of Japanese economic stabilization done here last spring by Mr. Joseph M. Dodge, financial adviser to General MacArthur, should be considered a significant service for the Occupation of Japan.
Respectfully yours,