Households to take hit from tax hike

The consumption tax increase next April will hit every household in Japan hard, with many people’s financial future hanging on whether their wages rise enough to offset the impact of the hike, experts say.

The sales tax hikes — to 8 percent in April 2014 and then to 10 percent in October 2015 — will deal a much heavier blow to individuals and families than the previous tax hike, in 1997, when the rate went to 5 percent, up from 3 percent, according to Rei Tsuruta, manager of the economic research office at Bank of Tokyo-Mitsubishi UFJ.

The ¥5 trillion economic package Prime Minister Shinzo Abe’s administration unveiled Tuesday to mitigate the impact of the tax hike is aimed at “spurring corporate business activity so corporations can raise wages, rather than aiding households directly,” Tsuruta said.

This contrasts with what the government did in 1989, when it introduced the flat 3 percent tax on goods and services, he said.

People actually ended up paying less in taxes as the 3 percent levy came with the abolishment of higher taxes on expensive goods — 23 percent for cars and 20 percent for large-screen TVs.

And in 1997, when the government bumped the consumption tax to 5 percent amid pressure to improve its fiscal health, large-scale income tax cuts softened the impact on household finances, Tsuruta said.

The decision this time to raise the sales tax comes after waves of cuts in social security benefits in recent years. So far it is unclear if the tax hike will help mitigate the cuts, or if the stimulus package will actually translate into higher wages, at a time of growing corporate optimism but long-stagnant wages.

Since 2011, people in all income levels have suffered declines in disposable income, as the child allowances have been reduced, pension premiums raised and a special income tax introduced to fund reconstruction in areas hit by the March 2011 Great East Japan Earthquake.

Estimates from private-sector think tanks figure the added burden for households starting next April will be ¥8 trillion or more per year. Certain goods and services, including renting property and health care, will remain tax exempt.

According to simulations by Dai-ichi Life Research Institute, the 3 percentage point increase in the consumption tax will translate into an additional burden of ¥57,890 per year for households with an annual income of ¥3 million to ¥3.5 million.

If the tax is raised to 10 percent in October 2015 as scheduled, it would mean an increase of ¥94,728 from the 5 percent rate for families in the ¥3 million to ¥3.5 million income bracket.

“While sales tax increases will affect every household, they will be especially tough for low-income households with many children and people with low-level pension income and meager savings, because they are feeling squeezed already,” said Shungo Koreeda, a researcher at Daiwa Institute of Research.

To cushion the impact of the sales tax increase on low-income families, the Abe team plans a one-time cash handout of ¥10,000 to every member belonging to households that are currently exempt from residential taxes, and an additional ¥5,000 each to pensioners over age 65.

Also, to keep people from rushing to buy property before April, which could cause demand to plummet immediately after the tax hike takes effect, the government will beef up tax breaks for people who get housing loans and give a maximum of ¥300,000 to home-buyers with an income of ¥5.1 million or less from April onward.

But the measures for home-buyers have mixed ramifications. The tax breaks and subsidy will mean some households will be better off financially if they wait until April. For others, the tax deduction and cash handout will not be enough to offset the difference in sales tax, Tsuruta said.

Koreeda also said that companies will need to raise salaries by at least by 3 percent for people to feel secure enough about their future to keep spending.