The Diet has started deliberations on bills to raise the consumption tax rate and reform the social welfare system. Two bills deal with pension-related issues such as beefing up benefits for low-income people and improving pension coverage for irregular workers. Another two bills are related to Prime Minister Yoshihiko Noda’s plan to raise the consumption tax from the current 5 percent to 8 percent from April 2014 and to 10 percent from October 2015. Three bills concern an effort to integrate yochi-en (kindergartens), which are for the education of preschoolers and currently under the jurisdiction of the education ministry, and hoiku-jo (day-care facilities for children), which are currently under the jurisdiction of the health and welfare ministry. Lawmakers should adequately discuss these important bills.
Mr. Noda has said that he will make efforts with an “indomitable resolve” to have the bills enacted by the Diet and will stake his political life on this goal. He places greatest priority on achieving the consumption tax hike in order to secure funds to stabilize the social welfare system and thus contribute to the nation’s financial reconstruction. But he must question whether such a policy can succeed at this point, given the poor state of the economy.
In the long run, raising the consumption tax rate may be necessary. But both Mr. Noda and the Liberal Democratic Party, which also calls for raising the consumption tax rate to 10 percent, should consider the wisdom of increasing the rate now when Japan has been reeling from a deflationary trend that has continued for more than 10 years and from the effects of the massive 3/11 disasters.
Even if the consumption tax rate is increased, it will not affect major companies much because they have the power to pass on the tax hike to consumers. But many small and medium-size enterprises will not have this option. The possibility cannot be ruled out that the introduction of a higher consumption tax will dampen overall economic activity and lead to less tax revenue.
The consumption tax is regressive in nature. Any increase will have a disproportionate impact on low-income people, but the Democratic Party of Japan has yet to present concrete measures to avoid such an outcome, such as exempting basic necessities such as food. Some DPJ lawmakers oppose Mr. Noda’s tax hike plan. They should build a strong case in support of their view using rational arguments based on sound economic theory.