OECD Urges Japan To Increase Consumption Tax

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

17 March 2006

The Organisation of Economic Cooperation and Development (OECD) has waded into Japan's taxation debate by suggesting that the government increase the rate of consumption tax to tackle the country's fiscal imbalances and mounting level of debt.

"Japan enjoys the lowest VAT rate in the OECD," observed the organistion's Secretary General Donald Johnston at a news conference in Tokyo.

"There is going to be scope for Japan to get more revenues from the VAT tax," he added.

Noting that consumption tax is a "powerful revenue source," Jeffrey Owens, director for the OECD centre for tax policy and administration, said given the level of public debt in Japan, the consumption tax should be raised to around 8 percent.

According to Owens, for every 1 percent increase in the sales tax additional tax revenues equivalent to 0.5 percent of GDP would be raised, although he said that it was unnecessary to increase sales tax to the 15-25 percent level seen in some European countries, as has been suggested by some government advisors.

Earlier in the year, economists suggested that a dramatic increase in Japan's consumption tax to help fund the country's growing social security bill will not be necessary if the government concentrates on measures to promote economic growth.

However, the government's fiscal advisors have consistently argued that consumption tax must be set nearer to European levels, if future administrations are to meet the challenges of an ageing society whilst servicing Japan's public debt, which at 150 percent of GDP is the highest in the developed world.

As Owens observed, it would then seem "not a question of whether, but a question of when," Japan's consumption tax is raised.

Owens also called on Japan to cut its corporate tax rate and broaden its tax base as part of a fundametal overhaul of the tax system.

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