Parties must explain need for consumption tax hike
It is time to answer the question of how to secure the financial resources needed to make the social security system sustainable.
Most of the public understand that the consumption tax, which spreads the burden on taxpayers broadly and thinly, is the only tax that can be tapped to provide a stable source of financing.
But deep debate on the consumption tax among the ruling and opposition parties in the run-up to the House of Representatives election is yet to occur. Even if the parties argue that priority should be given to economic recovery or thorough expenditure cuts, they also should try to show how a consumption tax rate hike might be achieved.
The ruling Liberal Democratic Party specifies in its manifesto that it will take the necessary legal steps by fiscal 2011 to implement drastic reform of the taxation system--including consumption tax changes--immediately after the economy turns for the better.
The LDP will designate the consumption tax as a special purpose tax, allowing it to allot all the increased revenue to social security programs, while gradually raising the consumption tax rate. The party also stated a deadline for completion of the preparation stage, which seems to be a responsible attitude for a ruling party.
In the 2005 lower house election, the ruling bloc pledged to implement drastic reform, including consumption tax reform, around fiscal 2007, but failed to fulfill their promise. If it intends to tackle the reform issue seriously this time, it should clearly state what the tax rate will be and when it will be raised.
DPJ must explain position
The main opposition Democratic Party of Japan said in its manifesto that it will not raise the consumption tax rate in the coming four years. In the run-up to the 2005 lower house election, the DPJ said it backed a three percentage point consumption tax rate hike. So far, the party has not sufficiently explained to the public why it has decided there is no need to raise the tax rate this time.
As part of its program for taxation reform announced in December 2008, the DPJ said the importance of the consumption tax would continue to grow and that it intended to draw up a framework for tax reform, including consumption tax changes, during its first term if it gains power.
If the DPJ intends to use the consumption tax as a financial resource to fund the social security system and begin to draw up a plan for drastic taxation reform, little would separate the DPJ and LDP on the issue. The DPJ therefore needs to admit it is necessary to increase the consumption tax burden and frankly explain the reasons why to the public.
Scope for a rate increase
At 25 percent, Sweden has the highest consumption tax rate in Europe, with value-added tax rates in much of the continent, including Britain, France and Germany, ranging from 15 percent to 20 percent. Those of China and South Korea are 17 percent and 10 percent, respectively, making Japan's 5 percent rather exceptional.
It is necessary to take into consideration the effect on low-income earners whose burden will become larger if the consumption tax rate is raised.
By allotting some of the increased revenue to the financing of social security programs, the benefits received by low-income earners can be increased. But at the same time, the question of what the reduced tax rate should be on daily necessities will arise. It will be necessary to consider making mandatory an invoicing system in which various taxes would have to be recorded on an itemized bill whenever a purchase is made.
The DPJ is proposing a system that would see low-income earners given payments equivalent to the consumption tax levied on daily necessities, but this leaves key problems unaddressed, including how to accurately assess each low-income earner's income. So, it is more realistic to first consider applying a lower tax rate on daily necessities than on other items.
(From The Yomiuri Shimbun, Aug. 9, 2009)