Cabinet ministers and business leaders have begun calling for a consumption tax hike to cover rising social security costs stemming from the aging population.
Although many economists agree the 5 percent tax must be raised at some point to provide revenues, the timing of any increase and the new level of the tax are issues that are still to be debated, a pressing matter amid an economy mired in a deep slump.
The Tax Commission, an advisory panel to the prime minister, resumed discussions on the issue at a general assembly Friday.
The recent calls for a tax hike come on the heels of a Jan. 1 proposal by Toyota Motor Corp. Chairman Hiroshi Okuda, head of the Japan Business Federation, the nation’s most powerful business lobby. He said the tax should be raised by 1 percentage point each year beginning in fiscal 2004 until it reaches 16 percent in fiscal 2014.
Kenji Yumoto, senior chief economist of the private think tank Japan Research Institute, said the tax would need to be raised to more than 15 percent by 2025 if the government adopts no other measures to finance social security costs and reform the system.
Yumoto said that in 2004 and 2005, the tax needs to rise by about 2 percentage points, which he estimates would add about 5 trillion yen to revenues.
Immediate revenue needs stem from pension and medical care programs. Under pension reforms, the government plans to raise its financial burden for the basic public pension program from 33.3 percent at present to 50 percent in fiscal 2004.
The government will also gradually raise its payments for medical care for the elderly from the current 30 percent to 50 percent over the next five years.
Business leaders want the consumption tax increased to keep employers’ social-security costs from rising and to reduce their burden of corporate tax.
Without an economic recovery or more radical welfare-system reform, costs faced by the national and local governments for social security programs — including pensions, welfare, medical care and nursing care — are likely to reach 64 trillion yen in 2025 from the current 24 trillion yen, Yumoto said.
Many economists say raising the consumption tax is the only — or the easiest — option available. Government revenues are overly dependent on income and corporate taxes, which are easily affected by economic slowdowns, they say.
Of government tax revenues, estimated at 45 trillion yen in fiscal 2002, nearly 60 percent come from direct taxes such as income and corporate taxes. About 20 percent, or nearly 10 trillion yen, come from the consumption tax, an indirect tax levied on most goods and services.
The government has had chronic budget deficits in recent years, forcing it to issue bonds every year, with a record 36.45 trillion yen worth planned for fiscal 2003.
The timing would be crucial for any increase in the consumption tax.
“This is absolutely not the right time for a tax hike,” said Hideo Kumano, senior economist at Dai-Ichi Life Research Institute, referring to the economic slump.
A hike would only further dampen the already slumping consumer spending. JRI’s Yumoto suggested that if the tax is raised by 2 points, spending will fall by 2 points. This translates into a 1.2 point fall in the gross domestic product.
Such a drop may help keep real GDP growth below zero. As it is, the government only expects 0.6 percent growth in fiscal 2003, which starts in April.
Dai-Ichi’s Kumano said that instead of resorting to a consumption tax hike, the government should first take steps to help revive the economy, by further engaging the private sector in public works projects and injecting public funds into ailing banks so they can accelerate their disposal of bad loans.
Hiroshi Kato, president at Chiba University of Commerce and a former chairman of the Tax Commission, said it will be at least five years before the economy is able to accommodate a consumption tax hike.
It will take that long just to discuss the social security system and decide on an ideal form for it, Kato said, pointing out that the economy is also expected to start recovering by that time.
An expanding economy could even handle a 10 percent tax if lower rates were set on daily necessities, such as food, he said, criticizing the incremental increases proposed by Okuda, which Kato believes would only encourage consumers to save more and not go on spending sprees before each tax rise.
Some economists believes the opposite, saying consumers would rush to buy things before the tax rises gradually.
Key economic ministers, including Finance Minister Masajuro Shiokawa, indicated earlier this month that they support a consumption tax hike.
But the government will probably refrain from deeper discussions on the issue until after the next election, said Yasunari Ueno, chief market economist at Mizuho Securities Co.
A House of Representative election may be held sometime this year, depending on whether Prime Minister Junichiro Koizumi dissolves the Lower House before the lawmakers’ four-year terms expire in June 2004.
Koizumi has said the government should push ahead with fiscal and administrative reforms instead of raising the consumption tax.
Talk of hiking the tax elicits in many a sense of deja vu.
In April 1997, when the government raised the tax from 3 percent to 5 percent, the economy plunged even further. The ruling Liberal Democratic Party suffered a setback in the Upper House election in July 1998, and Prime Minister Ryutaro Hashimoto was forced to step down.
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