Mr. Noda’s taxing problem

One-on-one Diet debates between Prime Minister Yoshihiko Noda and opposition leaders held on April 11 primarily concerned Mr. Noda’s plan to raise the consumption tax from April 2014. The prime minister has stated that he will stake his political life on the tax hike plan, and added that he will tackle the task of getting the bill passed with “grave determination.” The latter remark is widely interpreted as meaning that he will dissolve the Lower House for a snap election if the Diet votes down the bill.

Thus Mr. Noda has unquestionably demonstrated his eagerness to raise the consumption tax. But he must stop to consider whether he has fully answered all questions that people have about his tax hike plan. The biggest question is whether it is wise to raise the consumption tax at a time when Japan is suffering from long-term deflation. Households, which will face both the consumption tax hike as well as income and resident tax increases to fund post-3/11 reconstruction would likely tighten their purse strings, thus hampering Japan’s economic recovery. This in turn would lead to a reduction of overall tax revenues and thwart the government’s aim of fixing Japan’s finances.

An increase in the consumption tax, which is regressive, would hit low-income people hard and would cause difficulties and possibly even bankruptcy for many small and medium-size firms that are already experiencing financial problems because they are unable to pass the increased tax burden onto consumers through higher retail prices. Despite this, Mr. Noda remains silent on the potential adverse effects of a higher consumption tax.

Obsessed with his plan, Mr. Noda pointed out to LDP leader Sadakazu Taniguchi that the Liberal Democratic Party’s manifesto for the next general election calls for raising the consumption tax to 10 percent and asked him to join talks on the tax hike. Mr. Tanigaki turned the request down, saying that Mr. Noda has not presented an integrated plan to raise the consumption tax and reform the social welfare system. Komeito leader Natsuo Yamaguchi also pointed out that Mr. Noda has failed to present concrete plans to reform the pension system or to compensate for the regressive nature of the consumption tax.

As long as Mr. Noda fails to present a convincing proposal for social welfare reform, opposition to his plan to raise the consumption tax will only increase.