2002 Reports

The difference in taxation on financial transactions between Japan and the United States: Can the U.S. system and theory be the model?

Kawakami, Naotaka

The income taxation systems on financial transactions in Japan are much different from those in the U.S.; they adopt withholding and separated taxation systems on interest and capital gains from security transactions. These current systems reflect two characteristics of the Japanese society -- an excess savings economy and the restriction of tax implementation. The U.S. comprehensive income taxation system has long been a model since Japan had an overall tax reform based on the recommendations by Columbia Professor Shoup in 1950, but recently, many proposals of overall tax reform in the U.S. seem to deviate from the conventional idea of comprehensive income taxation and prefer a consumption tax or a broad-based income tax like the Comprehensive Business Income Tax (CBIT). Also in Japan, deviating from the idea of comprehensive taxation, the Dual Income Taxation (DIT) in the Nordic countries, which taxes all capital income at the proportional corporate tax rate lower than that on labor income, seem to attract more interest from tax specialists. Japan had major reforms of taxation on capital gains from security transactions in 2001. Focusing on the argument over the capital gains taxation and the overall taxation on capital income, this paper surveys the arguments of U.S. economists over them and their implications, evaluates the recent reforms of capital gains taxation in Japan, and argues about the desirable future taxation system in Japan.