Parties must stress need for consumption tax hike
Ahead of the official announcement of the House of Councillors election on Thursday, the Democratic Party of Japan and Liberal Democratic Party recently hammered out drastic tax reform proposals, including raising the consumption tax rate.
It is the wish of many people to rehabilitate this country's state finances, the worst among leading industrialized nations, and make the social security system sustainable. To this end, a consumption tax hike is obviously unavoidable.
It is the responsibility of politicians to try to convince the public of the need for a tax increase, even if it is painful. We hope to see the matter actively debated during the upcoming upper house election campaign.
At a press conference during which Prime Minister Naoto Kan announced the DPJ's campaign pledges, he referred to the consumption tax and said he would try to come up with an appropriate tax rate and tax reform proposals within the current fiscal year.
As for the consumption tax rate, Kan also said that he would use as reference the main opposition LDP's proposal of raising it to 10 percent from the current 5 percent. Kan's comment is a significant change from former Prime Minister Yukio Hatoyama's policy of making the issue of a consumption tax hike a no-go area.
The consumption tax rate, which was introduced in 1989 at 3 percent, was raised to 5 percent in 1997. Since then, past administrations have not squarely addressed the consumption tax issue. Kan should be praised for announcing a policy of raising the consumption tax rate this time.
At the press conference, Kan also expressed his intention to seek the people's mandate on the issue in the House of Representatives election before implementing a tax increase. However, an ideal opportunity could be lost if Kan takes things slowly.
DPJ talk political posturing
Some DPJ members have said that if the DPJ proposes raising the consumption tax rate to 10 percent as the LDP has done, the issue would not be a point of contention in the upper house election. This is, however, nothing but conventional election posturing.
Kan's policy was met by a backlash within the DPJ. He should speed up intraparty discussions and establish his party's basic policy on the issue.
The nation's debt-laden finances are in a critical situation due to the Hatoyama administration's dole-out policies that stuck to the DPJ's manifesto for the lower house election last summer, in addition to lavish economic stimulus measures after the bursting of the economic bubble.
It is estimated that cumulative long-term debts at the central and local governments will rise to 860 trillion yen as of the end of the current fiscal year--1.8 times the country's gross domestic product.
The fiscal 2010 budget is abnormal, with tax revenues falling to about 37 trillion yen, lower than the new government bond issuance, which has swollen to 44 trillion yen.
Due to the country's graying population, social security costs, which currently total more than 20 trillion yen a year, will increase by 1 trillion yen every year.
In fiscal 2009, the government's share of contributions to the basic pension payments was raised to 50 percent from one-third. However, increased contributions are provisionally funded by surplus funds in special accounts, dubbed "buried treasure," and a permanent revenue source of 2.5 trillion yen will be necessary in fiscal 2011 and thereafter.
"Integrated economic, fiscal and social security reforms," as touted by the Kan Cabinet, can only be achieved with stable revenue sources.
However, the income and corporate taxes that have been an important source of government revenues have substantially decreased due to the prolonged recession and a series of tax breaks. Therefore, the last resort is raising the consumption tax, a revenue source that does not fluctuate significantly due to changes in economic conditions and that spreads the burden widely among the public.
The country's 5 percent consumption tax is exceptionally low compared with 25 percent in Nordic countries, 16 percent to 20 percent in Spain, Britain and Italy, and 10 percent in South Korea.
Sixty-six percent of the respondents to a Yomiuri Shimbun survey conducted earlier this month said it is necessary to raise the consumption tax rate, greatly surpassing the 29 percent who said it is unnecessary. Many people lean toward the opinion that a consumption tax hike is unavoidable.
Where to spend revenue
Bones of contention regarding the consumption tax are not confined to such issues as the rate and timing of its introduction. Therefore, wide-ranging discussions will be needed.
The first point is where to spend the increased revenues from the tax hike. A 1 percentage point hike in the consumption tax rate would translate into a tax revenue increase of 2.4 trillion yen. If the tax rate is raised to 10 percent, tax revenues will increase by about 12 trillion yen.
Currently, revenues from the consumption tax are distributed among three fields: the basic pension program, health care for the elderly and nursing care. But Kan has expressed his intention to aggressively invest increased revenues in growth fields such as medical care and nursing industries in order to increase employment.
Using the increased tax revenues to expand government spending without careful consideration may simply repeat earlier mistakes. We believe the consumption tax will have to be spent exclusively for social security services.
Under the current system, 1 percentage point worth of revenue from the 5 percent consumption tax is allocated to local governments. In addition, a certain portion of the revenue is also provided to local governments as local tax grants. Consequently, the central government can spend only about 7 trillion yen out of the total consumption tax revenues.
Even if the consumption tax rate is raised to 10 percent, therefore, the central government is unlikely to have enough revenue from this source. The government may have to consider setting the rate at 15 percent or higher in the future, just as European countries do.
Help low-income earners
Another issue will be how to reduce the financial burden on low-income earners.
Because the consumption tax is imposed equally on everyone, those in low-income brackets tend to feel more of a burden than high-income earners.
To alleviate this problem, some countries have introduced a system under which consumption tax rates are set lower for food and other daily necessities. Such a system is worth considering in this country as well.
Another option may be to pay tax refunds to low-income earners to cover the cost of the consumption tax they pay for daily necessities. Before implementing such a system, however, it will be an urgent task for the government to consider introducing an identification number system for tax and social security in order to know which households will be eligible for the system.
(From The Yomiuri Shimbun,June 20, 2010)