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Fallout from the tax rise may hit in surprising ways

by Philip Brasor

Special To The Japan Times

Prior to the consumption tax increase last Tuesday, from 5 percent to 8 percent, Japanese consumers were spending to beat the band. The local business magazine Economist (not to be confused with the English language newsweekly) reports that ¥4 trillion was spent on goods and services in recent months because of the looming tax hike, and estimates “premature spending” will translate into big losses for a lot of companies by the end of the year. A strategist for Daiwa Securities told Asahi Shimbun two weeks ago that the pre-tax increase spree was bigger than expected, and predicts sales of certain goods will “grind to a halt” over the next several months. Financial journalist Nobuko Takahashi told the same newspaper that the “hoarding” brought on by the rush could even lead to health problems. If people stocked up on food and beverages, especially the alcoholic kind, they will feel compelled to consume those products more quickly and in larger amounts than they normally would.

When it comes to durable goods it’s likely that prices will drop so low by the summer that the tax increase won’t make a difference, but you don’t really need an economist to tell you that. Anyone with an elementary understanding of supply-and-demand can see that prices are bound to go down if consumers suddenly stop shopping, and yet the public acted as if it couldn’t help itself, because, as Tokyo Shimbun columnist Minako Saito pointed out, the media was focused on the inevitable rise in the tax at the exclusion of all other considerations, like the fact that small businesses can’t pay their share fair in the first place. Of the ¥593 billion in delinquent taxes recorded by the government in 2012, 54 percent was made up of unpaid consumption taxes.

Akihiko Matsui, who works at the Economics Research Center in the University of Tokyo, explained in Asahi how the “addition to price” (kakaku tenka) that reflects the tax hike works. At every stage of distribution, the seller has to collect a tax from the buyer and eventually hand it over to the government. A retailer who pays the levy to the supplier of a given product or service in turn adds that amount to the price of the product when he sells it. But demand for that product may decrease as the tax goes up, thus pushing the price back down. Matsui says that in the real world the retailer and the consumer split the tax since the seller offsets the hike with a slight discount in the price. He cites a survey by a Tokyo merchants association which found that only 60 percent said they would pass on the tax hike in full to consumers. Many also said they would probably make adjustments by increasing frequency of bargain sales or rates of discount for those bargain sales, or by offering bonuses for membership point programs.

Businesses, in order to maintain sales volumes, will likely absorb at least part of the consumption tax hike themselves, meaning consumers may not see as much of a dent in their buying power as they’ve been led to believe by the media, at least in the retail sector. It is a natural market phenomenon. The same thing happened when the consumption tax was raised in 1997. In fact, the current deflationary trend that is the bugbear of “Abenomics” started with the 1997 tax hike.

Last October, the government implemented the Act Concerning Special Measures for Pass-on of the Consumption Tax Increase, which endeavors to compel businesses to add the increase directly to prices, with no adjustments. In carrying out this directive, the Fair Trade Commission has hired an army of 600 “G-men,” retired businessmen and bureaucrats who will patrol commercial districts to make sure companies are complying.

An ostensible reason for this crackdown is to prevent large companies from bullying small and medium-size suppliers. In 1997, there was a problem with factories and wholesalers being pressured by customers to suck up the tax increase under threat of losing their business. The Asahi profiled a 75-year-old Tokyo printer who has already been asked by his customers to not pass on the consumption tax, the implication being that these customers will take their patronage elsewhere. Another Asahi profile looked at a dry goods retailer in Kyushu who admits to asking one of his wholesalers to absorb the consumption tax for blue tarp, his biggest-selling product. Otherwise he will have to cut wages.

Since there are no penalties attached to the law it probably won’t have much of an effect, and if you examine it carefully the purpose becomes clearer but not necessarily more logical. Stores cannot advertise that they are not passing on the consumption tax hike to attract customers. In principle, they are forbidden from absorbing the increase, but there is no realistic way to prevent them from doing so. In any case, they can simply avoid using the term “tax” and just say they are not raising prices, which is what retailer Mujirushi Ryohin is doing.

The special law is about appearances. The government can demand its extra 3 percent pound of flesh at every stage of distribution, because that part of the law is enforceable, so as long as individual payers come up with the money why should the government care how they do it? Apparently, it has to do with being responsible. As one of the G-men told Asahi, “It’s important to make consumers understand” that they have to pay their full share. The government’s justification for a consumption tax is that everyone, rich and poor, pays it equally, but that’s a delusion, because capitalism, especially the free-market type ostensibly worshipped by the ruling Liberal Democratic Party, favors those with the most economic power. Big manufacturers, like Toyota, can avoid the levy because much of their earnings are in exports, which are exempt from consumption taxes. Even the Ministry of Economy, Trade and Industry admits that most small companies will absorb at least part of the tax, and some will go bankrupt in the process. That’s the way the world works, whether the government likes it or not.