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A TAXING QUESTION

Selective consumption tax breaks inch closer

by Atsushi Kodera

Staff Writer

The consumption tax is going up to 8 percent next Tuesday, but consumers also have to brace for a another hike in October 2015, when the Abe administration plans to raise it all the way to 10 percent — double what it has been since 1997.

While the thought of having to tack another 10 percent onto every purchase is daunting, the government is considering providing some relief in the form of a reduced levy on daily necessities, particularly food, to mitigate the impact on low-income households.

While this measure is being weighed only for the second hike, in 2015, the ruling coalition is already gearing up for negotiations on which items should qualify for a lower rate and how much the reduction should be.

Why reduce the consumption tax for certain goods?

With the sales tax, the burden on each person goes up with the amount of consumption — the more you spend, the more you are taxed. This means wealthy individuals who buy expensive cars and dine at luxury restaurants will pay more than those who spend less.

That may seem fair, but the consumption tax is also regressive, meaning it takes a bigger bite out of the wallet of a poor person than a rich person. Lowering the sales tax on selected goods is seen as a way to counter this disparity.

How do things stand now?

Whether to introduce reduced rates for certain types of goods became an issue as soon as the consumption tax was first proposed in the 1980s. For one thing, it’s seen as a way of making the bitter pill of a tax hike easier for the public to swallow, though lawmakers have never gotten around to actually pulling the trigger.

But last December, the Liberal Democratic Party and its junior coalition partner New Komeito agreed to introduce lower rates on certain goods for the second phase of the current round of tax hikes. That hike is scheduled for the autumn of next year, except that Prime Minister Shinzo Abe has said he will consider the state of the economy before making the final decision on whether to enforce it.

Earlier this month, the LDP and New Komeito agreed to come up with a draft plan by May on how to determine which goods should qualify for reduced rates and to what extent.

What goods appear likely to get a reduced rate?

Daily necessities, especially food, are the obvious candidates, because such goods represent a significant portion of where lower-income earners spend their money, experts say.

New Komeito, which has been pushing for the reductions, came up with its own proposal last year to go easy on beverages and food, except for alcohol and dining out, and newspapers and books. But the party withdrew the proposal earlier this month and agreed to start over from scratch with the LDP.

This isn’t going to be easy for the ruling bloc because various industry groups, including those that support the LDP or New Komeito, are lobbying for reduced rates. Any breaks they get on their products are sure to raise the hackles of taxpayers.

Why is consumption tax being raised, instead of income or corporate taxes?

Japan will see a rapid decrease in the working population and an increase in retired people as society ages. This demographic situation is forcing the social welfare system to put a heavier burden on those still in the working population.

As such, increasing income taxes and corporate taxes is considered undesirable as it would add what is considered an unfair burden to the working population.

The consumption tax, which is collected from the wider population, including the elderly, is thought by lawmakers to be more appropriate for a hike.

What does the public think of reduced rates for some goods?

Not surprisingly, most people support the concept, opinion polls say.

In an online survey by the Mainichi Shimbun undertaken ahead of the Tokyo gubernatorial election in early February, 77 percent of around 70,000 respondents nationwide answered yes to the question: “If the consumption tax is raised to 10 percent, do you think the government should apply reduced rates to daily necessities?”

As many as 76 percent of the respondents in a joint nationwide poll in December by the Sankei Shimbun and Fuji News Network said that reduced rates “should be introduced” and 60.7 percent favored introducing them if the consumption tax rises to 10 percent as planned.

How do the experts view reduced rates?

Consumer desires notwithstanding, experts doubt if they’re worthwhile.

“First of all, the advantage of a value added tax (such as Japan’s consumption tax) is that it can be collected from a broad range of payers, and that enables limiting the rate to a relatively low level,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. “If reduced rates are applied to too many items, that would defeat the advantages of a value-added tax and ultimately make it look more like a commodity tax.”

The commodity tax, levied on luxury items, was abolished when the consumption tax was introduced in 1989 at a flat rate of 3 percent.

“There is no regressivity in the consumption tax in the first place,” argued Kazumasa Oguro, an associate professor of economics at Hosei University, in denying the notion that the less money a person makes, the more the tax hurts.

Oguro said statistics show that most people spend all of what they earn in their lifetime, regardless of income level.

That means that over the long term, everybody will eventually contribute 10 percent of their income to the government through the consumption tax, and that there is no need to look for ways to reduce the levy on lower-income people.

Why is New Komeito so keen on reduced rates?

NHK commentator Shinji Ota, in an analysis posted on the public broadcaster’s website, explains that when the consumption tax hike was first floated, New Komeito’s supporters opposed it, but the party leadership persuaded them to accept it by promising to introduce reduced rates, mainly on food. The party is trying to keep this promise.

The Weekly FYI appears Tuesdays. Readers are encouraged to send ideas, questions and opinions to hodobu@japantimes.co.jp .

  • http://twitter.com/midnightbrewer Cailean Babcock

    Increasing corporate taxes would increase corporate spending, forcing them to break their bad habit of hoarding cash. At the very least this would force them to reinvest in the economy rather than let the government do it for them. Optimistically, such investment might be reflected in higher wages.

    The problem about the consumption tax hike is that the government is forced to split whatever they get with local governments, meaning that what they ultimately receive will have very little impact on the national budget as a whole (and no one has said that the money is earmarked for social welfare). Combine that with the predictable consumer reaction of cutting back on spending (a previous Japan Times article survey said over 60% plan to cut back), and Abenomics is looking to push the economy further into a recession.

    The stock market is doing gangbusters, though, so if you’re rich you’re set.

  • Demosthenes

    Abenomics is a sham. It would have been better to just cut taxes, pull back on Japan’s government spending, and especially deregulate to make Japan an attractive place for foreign investment. This tax and spend madness that Abe is engaging in will just bankrupt the country. Increasing consumption tax will just mean Japanese people will spend less – history has shown that from when previous administrations tried it. As for the booming stock market, that’s being fuelled by BOJ asset purchase plans backed by Japanese people’s pensions. Once the spending stops there and people realize stock prices have been fuelled by speculation and not business fundamentals, it’s going to be ugly crash…

  • C321

    Which ever way you look at it VAT/sales tax is a regressive tax. Poor/normal people have to pay it on virtually their entire income whereas rich people frequently avoid paying it on the majority of their money as they are not using most of their money to purchase goods. Oguro’s point is nonsense for this reason but also because while rich people can easily afford to lose an additional 5% of their income, poor people may already not have enough income for basics or a reasonable standard of living and so 5% will have real world damaging effects on them. This is what rich people don’t understand, that budgeting is not an option if you don’t have a surplus in the first place (which many, many people do not).