Consumption tax increase: Fairness is in the eye of the beholder

April 9th, 2012 by Philip Brasor & Masako Tsubuku

The Japan Communist Party opposes the proposed consumption tax increase

Ever since Yoshihiko Noda became prime minister last summer he has been staking his political career on approval for an increase of the consumption tax as a means of bringing the national debt under control. In the process he needs to convince everyone that it is the fairest tax there is. His one-note tone of self-sacrifice is starting to make people wonder, though. Last year a majority of citizens said they’d go along with a tax increase, but lately that number has dropped significantly. On April 2, the Mainichi Shimbun published the results of a phone survey that found 60 percent of respondents opposed any increase, a 2 percentage point increase from a month earlier.

So is it fair? The research institute of Daiichi Life Insurance studied the matter and found that a household of four (married couple, two children) with an income of between ¥4 million and ¥5 million would pay out ¥60,000 more a year in consumption tax if the rate went up to 8 percent, which, according to Noda’s current proposal, would happen in 2014. Then, when a second boost pushes the rate to 10 percent in 2015, this household will pay out ¥100,000 more than it does now.

In principle, the more money you make, the more you consume and thus the more you pay. And this is true to a certain extent. Daiichi Research found that a family of four making ¥8 million a year will pay out about ¥90,000 more per year when the tax goes up to 8 percent, and ¥150,000 more when it increases to 10 percent. So the gap between the lower and higher income groups at 8 percent is ¥30,000 and the gap at 10 percent is ¥50,000.

However, where the change will really be felt is in terms of disposable income, since starting in 2013 income taxes will also increase in order to pay for reconstruction of the disaster-hit Tohoku region. Though there will be deductions and exclusions that can make each taxpayer’s situation different, Daiichi found that, compared to 2011, taking all these new taxes into consideration the household that makes less than ¥5 million a year will have ¥310,000 less disposable income a year when the 10 percent consumption tax kicks in in 2015. The ¥8 million household will have ¥410,000 less in disposable income. Though the richer household makes twice as much money, it loses only 5 percent in terms of disposable income with the increase, while the poorer household loses almost 8 percent in terms of disposable income.

The consumption tax covers everything consumed, including food and other necessities. Consequently, the burden weighs more heavily on lower income households than it does on richer ones, since basic essentials are assumed to be about the same for everyone regardless of income. That means there is less money to spend on non-essential items and, presumably, lower income households won’t. Retailers and other commercial enterprises will have to compete more aggressively for upper income customers because those at the other end of the spectrum won’t be making as many purchases in order to make ends meet.

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3 Responses

  1. The public is right to not support an increase in the consumption tax. I don’t think the Ministry of Finance should be able to impose a consumption tax increase to finance public debt that was ostensibly created by the bureaucracy. Instead they should raise capital gains taxes, stop allocating resources to manufacturing and export orientated industries, finance a safety net to catch those who will be affected by the restructuring, and stop using the current account surplus as a measure of well being. Raising the consumption tax is not going to reduce debt, it will just depress consumption like their regressive tax plan in 1997. Which will just reinforce the pattern of domestic savings to finance overproduction, continuing the decline of income as a part of GDP growth. I am curious when will the Japanese people realize that the Japanese government, i.e., the bureaucracy has engendered extractive economic institutions, and there is no way to induce policy change because the Japanese bureaucracy operates in an extra-legal manner. It is not bound by civil or constitutional law. It is essentially an oligarchic elite that wishes to perpetuate its own existence and status in society at the expense of the population. Restructuring will result in massive destabilization and upheavals which will eliminate their control of society. In this they are not quite different from past extractive governments in history, and not quite different from China. Though I must point out that at least the yuan is explicitly pegged to the dollar and Chinese leadership is quick to explain that much of the costs of their fixed rate and export policy is borne by the Chinese population.

  2. It’s worth noting that both these tax increases — consumption and income –are coming hot on the heels of a doubling (!) of the residential tax in Tokyo (to pay for Gov. Ishihara’s failed banking scheme) and incremental increases in national health insurance. In a shaky economy, I can think of no better way to kill off disposable income and domestic demand — what are they thinking?

  3. The remarkable failure of the article is to explain in detail the loss of purchase power of families making 5 million or more per year. It does consider the pensioner living on his state pension and for whom every trip to the doctor has to be planned financially. You can expand the cost of your shopping basket of food, if you can afford it, but how much can you reduce the cost of your food basket to make ends meet if you have to feed a family with an income of 150000 yen monthly?

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