Two weeks ago, the Lower House passed a law to increase the consumption tax to 10 percent by 2015, something Prime Minister Yoshihiko Noda has been pushing with blinkered, self-sacrificial dedication. Eventual final passage seems inevitable at this point, and so the only aspect deemed worthy of discussion by the major media is how it affects the ruling Democratic Party of Japan, which has splintered over the bill. As discussed in this space in April, the media bought the consumption tax hike a long time ago and the Finance Ministry made sure the dailies and TV networks “understood” what was at stake, namely Japan’s future, which is being threatened by huge government deficits. Even the BBC seems to support the increase based on the idea that the consumption tax is too low by world standards. Experts who claim that the deficit is manageable and/or that the consumption tax isn’t the best way to tackle it have been ignored, and now that the central issue has been pushed aside by the DPJ defection there’s nothing left to talk about.

But actually there’s a lot, even if it’s too late for it to make a difference. Even more fundamental to the debate than the meaning of the national debt and the uses of tax revenues is the structure of the tax itself, and several media outlets have gotten around to explaining how the consumption tax is collected. What’s shocking is that a good portion of the money consumers believe they are paying as a tax when they buy something in fact never really makes it to the treasury.

To begin with, the consumption tax is not a U.S.-style sales tax, which is how many people understand it. With a sales tax, the retailer adds the tax fee on to the price, collects the money and then passes it on to the relevant tax authority. Japan’s consumption tax is more like Europe’s VAT, which levies a tax at every stage of distribution: wholesalers pay it when they buy from manufacturers, retailers pay it when they buy from wholesalers, etc. However, the business that “collects” the 5 percent tax doesn’t pass that money directly on to the tax authority. Instead, it pays the tax as a function of revenue by subtracting from its sales figures the amount of money it spent on supplies—including the required consumption tax—and then multiplying the difference by 0.05. The final product of this calculation is the money it owes to the government.

The idea that the consumer is currently paying a 5 percent levy is an illusion, since businesses are free to set prices however they want and the consumption tax is expressed as “part” (uchizei) of the selling price. Sometimes a retailer can benefit from this system. For instance, the law exempts a business from having to pass on consumption tax if its annual sales are less than ¥10 million (until 2004 it was ¥30 million). The magazine Aera profiled a small Tokyo printer whose sales last year were about ¥8 million, but until he closed his accounts at the end of 2011 he didn’t know how much revenue he would make, and so he charged his customers consumption tax during the year. He ended up collecting ¥400,000 in consumption tax from customers, and since he spent ¥3.6 million on supplies, that means he paid ¥180,000 in consumption taxes to those suppliers. That left him with a surplus of ¥220,000 because he ended up making less than ¥10 million and thus didn’t have to pass any of the collected consumption tax on to the government.

However, many small businesses end up in the red. Tokyo Shimbun reported on a small non-profit organization that makes box lunches for the elderly. This NPO increasingly has to compete with larger box lunch makers that buy supplies in bulk and charge less. In order to compete, the NPO has to cut its prices, but it still has to pay a consumption tax even when it loses money. That’s because its biggest expense is personnel, which doesn’t count as supplies (shiire) and thus can’t be subtracted from sales when calculating the consumption tax it owes to the government.

The businesses that really benefit from the consumption tax are major exporters, since they can’t collect it for goods they sell overseas. Consequently, exporters receive automatic refunds from the central and local governments for taxes they are deemed to have paid to subcontractors and other suppliers. There is a common business practice called shitauke tataki—pressuring suppliers to keep prices down, usually by threatening to use different suppliers or move operations overseas. The exporter coerces the supplier into absorbing the consumption tax it is required to levy on the exporter. Kyoji Koto, an accountant who often appears in media stories regarding this issue, told Tokyo Shimbun that Toyota made ¥224 billion in 2010 through consumption tax refunds, and since part of this money has to be paid by local governments, Toyota City found itself ¥105 billion in the red. It’s no wonder then that the Japan Business Federation, or Keidanren, supports the consumption tax. For exporters it amounts to a government subsidy that will only increase with the coming tax hike. In interviews, Koto has claimed that Keidanren is the main motive force behind the hike.

The Noda administration insists that the consumption tax is the “fairest” means of solving the debt crisis, since it supposedly targets everyone, rich and poor, equally. But regardless of the stifling effect the tax increase will have on consumer spending, small and medium-sized businesses disproportionately shoulder the burden of paying it. In 2010, companies owed ¥683 billion in consumption taxes but had only paid ¥340 billion, a delinquency rate of almost 50 percent. Economists are predicting the delinquency rate will actually go down even as the consumption tax goes up since the increase will also result in more bankruptcies. To bureaucrats and big business executives who are behind the tax increase, that’s what fairness is all about, at least in the Darwinian sense.

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