Japan Considers Gradual Consumption Tax Hike

by Mary Swire, Tax-News.com, Hong Kong

02 June 2011

The panel established by Prime Minister Naoto Kan to consider social security and tax policy reforms has received a recommendation that Japan’s consumption tax should be raised in stages, so as not to affect the country’s economic growth prospects.

Before the earthquake and tsunami in March this year, Kan had established the panel to work on proposals, to be put forward by this month, to finance increasing social security outlays in Japan. He had reiterated on a number of occasions that it was imperative to discuss reforms to the tax system, linked directly to providing the financial resources necessary to fund the rapidly-increasing costs of pensions and health care.

As it was apparent that present taxes would be unable to provide the necessary revenue to cope with those costs, the government’s reform programme had been expected to include, particularly, a hike in Japan’s 5% consumption tax, despite the government still being nervous of proposing such an increase after a proposal to double it to 10% became a major cause of its losing its majority in the parliamentary upper house last year.

With all of the credit rating agencies now linking a maintenance of Japan’s ratings to the formulation by the government of credible fiscal structural proposals, Kan has maintained his promise to produce a programme of reform this month through the advisory panel, despite the additional problems caused by the reconstruction effort after the earthquake.

The advisory panel, which includes members of Kan’s government, has now received a recommendation from some of its private sector members that, as a rise in consumption tax will be necessary, that increase should be done in stages so as to reduce, as far as possible, the effect on Japan’s weak economic growth prospects. It is said that two stages could be necessary – the first of 3%, and a second of 2% - in the period to 2015.

However, it is also reported that, as Kan has previously promised that the government would not introduce any such increase in consumption tax before the next parliamentary elections in August 2013, he would have to call for elections if he decided to go ahead before then.

Furthermore, it appears to be agreed that the government should use the additional consumption tax revenue to cover its additional social security costs, rather than on the reconstruction effort in the north-east of the country. Despite Japan’s public debt reaching over twice its gross domestic product, it is now expected that reconstruction will be largely financed by further government bond issues and by debt purchases by the Bank of Japan.

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