Prime Minister Shinzo Abe announced at his Cabinet’s Oct. 15 meeting that the government would raise the consumption tax to 10 percent in October 2019 as planned. He had made a similar statement during the campaign for last year’s Lower House election, but this time he made it even clearer that he will go ahead with the planned tax hike.
The decision on consumption tax hikes dates back to the 2012 tripartite agreement among the then-ruling Democratic Party of Japan and then-opposition Liberal Democratic Party and Komeito to set schedules on the tax hikes and social security reforms. Based on the agreement, the Abe administration in 2014 raised the consumption tax from 5 percent to 8 percent. However, the hike significantly hurt the economy and the rise in consumer prices, which were beginning to pick up as a result of the Bank of Japan’s monetary easing program, ground to a halt. Subsequently the prime minister twice postponed the planned second-phase hike to 10 percent. But this time he appears determined to proceed with it.
As an economist, I have steadfastly opposed the tax hike, although here I will not go into details about why. Still, I find several points about consumption tax hikes strange. I would like to cite three of them to provoke discussion.
The first point is that leaders of the business community unanimously support the consumption tax hike. Normally, I would expect business leaders to oppose any tax increase. The economy took a turn for the worse and corporate earnings fell as a result of the last hike in 2014, and in recent years they have finally recovered from its negative effects. Nevertheless, top leaders of major business organizations such as Keidanren (Japan Business Federation) and Keizai Doyukai (Japan Association of Corporate Executives) strongly push for the tax hike.
One plausible explanation is that the consumption tax rate in Japan is still quite low compared with similar indirect taxes in other economies, especially those in Europe, while corporate tax remains quite high. For example, the rate of the value-added tax in European economies is around 20 percent, while the current consumption tax rate is 8 percent in Japan. Tax cuts introduced by the Trump administration pushed down the corporate tax to 21 percent in the United States, whereas the rate remains around 30 percent in this country. Business leaders may want to correct such an imbalance between taxes. However, further hikes in the consumption tax and cuts to corporate tax will likely incur strong political criticism.
The second point I find strange is that the editorials of major newspapers and commentaries by economists — believed to be penned by people with expert knowledge on the issue — seem to ignore an important piece of information. Most of the big newspapers support the tax hike, and so do many economists. Behind their argument is the recognition that Japan has a massive fiscal debt — and that the consumption tax rate is still relatively low. However, two Nobel Prize-winning U.S. economists have highlighted an important point — that Japan’s government debt is in fact not as large as is popularly believed.
Columbia University professor Joseph Stiglitz made the point when he spoke at the Japanese government’s Council on Economic and Fiscal Policy. It is often emphasized that Japan’s outstanding government bonds are more than twice as large as its gross domestic product. But that represents the gross debt, and the government’s outstanding debt on a net basis after subtracting its assets are not so large. Furthermore, since roughly a quarter of the outstanding bonds are held by the BOJ, the debts as seen on the government and the central bank’s consolidated balance sheet are quite small. A similar point was made by Princeton University professor Christopher Sims in a debate held at the Japan Society in New York. Regrettably, most of Japan’s mainstream media do not report on such views.
The third point concerns the negative impact of the tax hike on the economy. In the first place, how and why the consumption tax hike in 2014 so heavily hurt the economy has not yet been fully discussed and analyzed. In 2013 — the first full year of the Abe administration — share prices surged 57 percent but only increased by 7 percent in 2014. Several explanations can be made — such as that the fundamentals of the Japanese economy had not yet fully recovered, or that the tax was raised even though people’s expectations for the future were not strong enough. But there is one important issue that is ignored — that in Japan, there are no reduced tax rates for expensive goods.
It has been agreed that in the consumption tax hike next year, a reduced rate will be applied to some products such as food and drinks. However, a reduced rate on expensive consumer products is not even under discussion. European countries that impose high value-added tax rates have some measures to reduce the burden on expensive consumption. For example, Sweden, which has a VAT of 26 percent, reduces the tax rate on housing purchases to zero. Other European economies have similar schemes. In Japan, people pay the same rate for housing purchases as they do for other products.
The tax hike in 2014 sharply pushed down demand for high-priced items such as houses and cars. Nevertheless, the business community does not discuss the issue, nor does the media pay enough attention to the matter.
Efforts should be made to trim the fiscal debt. But I do not believe that consumption tax hikes should automatically be the answer. We should at least stop and discuss the questions that I’ve raised.
Heizo Takenaka, a professor emeritus at Keio University, served as economic and fiscal policy minister in the Cabinet of Prime Minister Junichiro Koizumi from 2001 to 2005. He is a member of the government’s Industrial Competitiveness Council.