Japan urged to triple tax

Reviewed By Hitoshi URABE

Article:
"Japan urged to triple tax"
http://www.iht.com/ihtsearch.php?id=78213&owner=(Bloomberg%20News)&date=20021126164505
(by Bloomberg News) International Herald Tribune

Comments:

This is a short article quoting the remarks made by Mr Okuda, chairperson of Nippon Keidanren, the Japan Business Federation. He has said that the consumption tax could be raised by 1 percent every year, beginning from 2004 to end in 2014 at 16 percent. This should compensate for the decrease of revenues to be brought about by the suggested reduction of corporate taxes next year, he says.

Mr Okuda's immediate intention seems obvious. He would like to see corporate taxes reduced when the government, despite being sympathetic to the idea of less tax burden for industries to help recover the economy, feels it must find some means of income to offset the revenue decline. It might be fair, though, to note that Mr Okuda did not make his remarks in this format directly relating the corporate and consumption taxes. He said the corporate tax in Japan is high compared to international levels in one context, and he suggested raising the consumption tax in another line of study, although it was inevitable for the listeners to relate the two in their minds.

The rate of consumption tax in Japan currently is at 5 percent. It is among the lowest among the countries that exercise similar taxes, and definitely the lowest among the developed countries. In fact, the European Union, in its currently effective directive, instructs the member governments to set the range of their consumption tax to somewhere between 15 and 25 percent. U.S. and Canada, where the tax rates differ depending on the region, has effective rates generally between 7 and 15 percent. In that context, therefore, Japan's tax rate seems possible to be increased.

Consumption tax was first introduced in Japan in 1989. Until then, there was no tax levied at the time of sales, at least in visible form. There was excise tax on all sorts of merchandise, from diamonds to VTR's, which were included, or concealed, in the sticker price. In an attempt to make the transition smoothly, the initial rate of consumption tax was fixed at a mere 3 percent, with the explanation that it is only to setoff the excise tax being abolished. Even with this and other precautions, however, the government at the time, led by Mr Takeshita, had to resign, facing people's strong resentment toward the new tax.

Then in 1997, the rate was increased to 5 percent. Still amidst depression in retrospect, it was believed at the time that the aftermath of the collapse of bubble economy was finally being overcome, and it was the time to take a step toward reclaiming a healthy budget, to reduce public debt. Unfortunately, it again caused people to fly into rage, which forced the Hashimoto cabinet out of the office. Furthermore, it was later pointed out by critics that the tax rate increase was the villain effectively killing the chance of recovery out of recession at that point.

Thus, the consumption tax has become an inauspicious subject for politicians to tackle. While there are worthwhile arguments in favor of raising the tax rate, governments have avoided getting involved in the discussions for the fear of facing people's anger. It would be interesting to see if this government, led by the revolutionist Koizumi, as he calls himself, is truly determined to confront the political risk of reviewing consumption, and other, taxes.