Business / Economy | The Argument: Consumption tax

The consumption tax: Should Japan raise it beyond 10 percent?

The Argument is a new feature dedicated to promoting dialogue and deeper understanding of contentious issues by introducing various viewpoints.

After being delayed twice, Japan’s consumption tax will be raised to 10 percent from 8 percent on Oct. 1.

The tax hike is anticipated to dampen the economy amid worries of a global economic downturn, but proponents say that the tax hike — no matter how unpopular — needs to take place if the country is to foot the bill for its ballooning social welfare costs.

The consumption tax was introduced in Japan during the height of the bubble economy in 1989 at the rate of 3 percent to finance social welfare spending, as Tokyo was becoming increasingly cognizant of the country’s future demographics. The tax was later raised to 5 percent in 1997.

And yet, government spending continued to snowball as the country continued to fight deflation and a stagnant economy, feeding the perennially grim outlook on Japan’s aging society and dwindling population.

In order to cover the nation’s ballooning social welfare costs, a deal was made in 2012 among the then-ruling Democratic Party, the Liberal Democratic Party and New Komeito. The agreement paved the way for a raise in the tax rate to 8 percent in April 2014 and 10 percent in October 2015.

Certainly, politicians have been averse to raising the consumption tax, especially since 1997, when the hike to 5 percent was widely credited for dooming then-Prime Minister Ryutaro Hashimoto’s political fortunes, with his LDP being roundly trounced in the Upper House elections that year, leading to his resignation.

So even though the Shinzo Abe administration raised the tax rate to 8 percent as stipulated by law, the prime minister delayed the scheduled tax raise to 10 percent twice.

Perhaps being fully aware of the economic and political consequences of such tax hikes, Abe has said he sees no need to raise consumption tax beyond 10 percent in the next decade.

Still, some experts say the planned raise is not enough. Some even go so far as to suggest that the aging country needs to raise the consumption tax to beyond 20 percent.

For example, the Organisation for Economic Co-operation and Development has recommended that Japan eventually raise its consumption tax to 25 percent or 26 percent.

Proponents of a further tax hike say that the consumption tax allows a diverse range of generations to pay for their share of the rapidly expanding social care, and that Japan’s tax rate is one of the lowest among developed nations. Opponents say that they cannot stomach an increase while their salaries remain stagnant.

In the end, does Japan need to raise the consumption tax further to pay for social welfare, even at a risk to the economy?

The Japan Times asked two experts, Shigeki Morinobu, interviewed by staff writer Osamu Tsukimori, and Etsuro Honda, by Satoshi Sugiyama, to respond to this question.