Introduce reduced tax rate when consumption tax is raised to 8%
If the government would like to soften the public’s feeling of shouldering a burden when it raises the consumption tax rate, it is essential to introduce a reduced tax rate to keep the tax on daily necessities at the current level.
The government and ruling parties must start taking concrete steps toward introducing the reduced tax rate simultaneously with the increase of the consumption tax rate to 8 percent.
Prime Minister Shinzo Abe has reportedly decided to increase the consumption tax rate from 5 percent to 8 percent in April next year. He is now trying to compile a \5 trillion-level economic stimulus package to keep the economy from a possible slowdown after the tax rate is raised.
Although the economy has started to pick up, the recovery is not full-fledged. The road to overcoming deflation, for instance, is still unclear. It would be best for the government to shelve the tax rate increase to 8 percent. However, we understand that aiming at introducing an economic package is the second-best option.
That said, we think the measures contained in the package currently being studied by the government to curb a possible downturn in personal spending are insufficient.
The consumption tax has a regressive character, meaning the burden it places on low-income earners is relatively heavy. For this reason, the government is now studying a “simplified benefit plan,” under which it will provide \10,000 to \15,000 per head in benefits to low-income households, such as those earning too little to have to pay resident taxes.
However, the effects of such a temporary cash provision plan in supporting household finances after the tax hike will be short-lived. It is only reasonable to introduce a reduced tax rate that a wide range of people, including low-income earners, can expect to benefit from.
As part of the economic stimulus package, the government and ruling parties are studying an option of moving ahead the abolition of a special corporate tax for reconstruction by one year. The tax was added to the regular corporate tax to provide a revenue source for reconstruction from the March 2011 Great East Japan Earthquake.
Reduce rate for basics
With the investment tax credit, a main pillar of the stimulus package, the government aims at establishing a virtuous cycle by prompting corporate earnings growth, which could in turn result in a pay hike.
Consumers have strongly criticized the measures as preferential treatment of corporations. Also, we are worried that it will take time for the effects of the prop-up measure for companies to reach households.
On the other hand, a reduced tax rate has the advantage of making consumers feel that they are shouldering less of a financial burden in their daily purchases.
The government and ruling parties have been pressing their aim to introduce the reduced tax rates when the consumption tax rate is raised to 10 percent, not when it is raised to 8 percent.
However, a 3 percentage point rise all at once would have a significant impact on household finances. It is important to introduce the reduced rate when the government raises the tax rate to 8 percent and to keep it at the current 5 percent for selected items.
Items subject to the reduced tax rate should be narrowed down to basic food products that are indispensable for daily life, such as rice and miso bean paste, as well as newspapers, which support democracy and print culture, among other things.
European countries have adopted reduced tax rates. Many nations set their value-added tax, the counterpart of Japan’s consumption tax, at about 20 percent. As reduced tax rates have already taken root in these countries, people are more likely to accept high tax rates.
As it is commonly recognized that a tax should not be levied on knowledge, most of these countries made newspapers subject to the reduced tax rate system. Japan must learn from such examples.
(From The Yomiuri Shimbun, Sept. 26, 2013)