Although the government has little choice but to raise the consumption tax to reduce Japan’s mountain of debt, any increase is likely to hit the poor the hardest, an economist at a major think tank warned Thursday.
“A rise in the consumption tax has a considerable effect on household expenditures, and its negative impact is higher for lower income groups,” said Kosuke Shiraishi, senior economist at Mitsubishi Research Institute Inc.
As was pointed out in the government’s 2006 economic policy guidelines in July, if revenue and expenditures continue on their current trend, the budget will have a deficit of up to 5 trillion yen by 2011. By that year, the government hopes to achieve a primary balance (before interest payments) in the combined central and local government budget. To reach this goal, the guidelines propose a consumption tax hike of a little less than three percentage points.
Speaking at a media briefing, Shiraishi said an increase of up to five percentage points will, in fact, be necessary to cover the shortfall.
But raising the tax by that much will cut disposable income by 2.8 percent for those with a yearly income of about 2.6 million yen. A richer household making about 9 million yen per year would see its disposable income fall by 2.6 percent.
To cushion the blow, the government is thinking of holding down the tax on items like food, water, medication, travel and printed matter.
Shiraishi said that while he is skeptical of such plans because the consumption tax should be “simple and neutral,” his think tank did find that this would lessen the impact on people with low incomes.
If the consumption tax for the five commodities is held to five percent, while the tax on other goods and services rises to 10 percent, the decline in disposable income for the low-income group would be less steep at 2.3 percent, he said.
The effect of lower taxes on food is especially large for the lower income group because it is an essential good that accounts for over 10 percent of spending in such households.