Approach tax hike with caution

The Noda Cabinet on Friday endorsed and submitted to the Diet a bill aimed at raising the consumption tax from the current 5 percent to 8 percent from April in 2014 and to 10 percent from October 2015. Prime Minister Yoshihiko Noda is so obsessed with a tax hike that he seems oblivious to the possible negative effects it could have on the economy.

A law has been already enacted to increase taxes to fund the reconstruction of areas hit by the 3/11 triple disasters, the main features being a 2.1 percent surcharge on income tax for 25 years from January 2013 and a ¥1,000 surcharge on resident tax for 10 years from June 2014. One wonders whether Mr. Noda has carefully considered the wisdom of raising the consumption tax when the public is already being forced to shoulder a heavier tax burden.

Before the Cabinet’s endorsement of the bill for the consumption tax hikes, Democratic Party of Japan lawmakers held an eight-day meeting through Wednesday in which they spent about 45 hours discussing the drafting of the bill. The meeting was drawn out because some DPJ lawmakers put up fierce resistance to the plan.

The party leadership revised some points of the draft bill to accommodate these lawmakers’ demands. For example, it deleted a clause that hinted at raising the consumption tax to a level above 10 percent in fiscal 2016. It also agreed to include a clause that states that a turnaround of the economy is the prerequisite for raising the consumption tax and that the government will take measures to achieve 3 percent nominal growth and 2 percent real growth in gross domestic product. But meeting such a goal might require massive spending to stimulate the economy, which could negate Mr. Noda’s hope to restore the nation’s financial health.

The Cabinet Office says that even a 10 percent consumption tax is not enough to cover increasing social security spending and fiscal 2020 will see a deficit of ¥16.6 trillion — equivalent to revenues from a 6 percent consumption tax. The International Monetary Fund says that Japan should raise the consumption tax to 15 percent. But the government and the IMF appear to believe that the effects of the planned tax hikes on the economy will be neutral.

The government should bear in mind the possibility that the tax rate increases could dampen consumption and investment. Such an outcome would put a brake on Japan’s economic recovery, thus causing overall tax revenues to dwindle and making a restoration of the nation’s fiscal health all the more difficult.