Get cracking on consumption tax talks
The Democratic Party of Japan's crushing defeat in Sunday's House of Councillors election has raised concern that discussions on far-reaching tax reform, including a possible consumption tax hike, will be put on the back burner.
DPJ Secretary General Yukio Edano has indicated his intention not to stick to Prime Minister Naoto Kan's plan of formulating concrete plans on tax reform by the end of fiscal 2010. "We won't necessarily adhere to the initial deadline," Edano said.
However, the government cannot put off discussions on consumption tax any longer. The nation is mired in an extraordinary fiscal condition in which tax revenue is less than the amount of new government bonds issued. Furthermore, the increasingly creaky social security system needs urgent repair.
The Kan Cabinet must swiftly resuscitate the economy, which in turn will boost tax revenue, and knuckle down to reform the tax system--including consumption, corporate and income taxes.
The election defeat has stung Kan. But the prime minister must dust himself off and start full-fledged efforts to coordinate intraparty opinions on consumption tax and continue inviting opposition parties to start suprapartisan discussions on the issue.
We urge the opposition camp to take up the prime minister's offer of discussions on a new consumption tax system.
Tax not reason for defeat
At Tuesday's Cabinet meeting, Kan suggested the consumption tax dispute contributed to the ruling bloc's failure to retain its majority in the upper house, saying his remarks on the issue just before the election likely caught the public by surprise.
However, the main opposition Liberal Democratic Party increased its number of upper chamber seats, despite proposing raising the consumption tax rate to 10 percent in its election platform.
A Yomiuri Shimbun survey taken after Sunday's election showed more than 60 percent of the public believe a consumption tax hike will be necessary. This figure barely changed from a similar survey conducted before the election.
In the election, voters did not give a verdict on a consumption tax hike per se, but rather on Kan's inconsistent remarks on the matter.
During the campaign, Kan failed to present clear principles on fundamental questions about a consumption tax hike, such as why an increase is necessary and how the extra tax revenue it brings in would be used.
When Kan found himself being boxed in by criticism over the consumption tax issue, he tweaked his previous statement, saying he would not raise "even yen1" in consumption tax until the next general election. This gave the impression that Kan was uncertain what to do.
Build intraparty consensus
To restore public trust in the DPJ, the party must form a consensus on a consumption tax hike as soon as possible and carefully explain its position to the public.
Future discussions likely will focus on measures to alleviate the burden any increase would place on low-income earners, among other issues.
A consumption tax refund was one option floated, but this idea is fraught with problems, such as where to draw the line on household income that would be subject to the scheme and how accurately the government can calculate individual households' income.
A reduced tax rate system, under which tax rates are set lower for daily necessities and other items, might be one possibility. Given that reduced tax rates are applied to newspapers, books and food in some European countries, such a system is certainly worth consideration.
The DPJ must spell out that the primary purpose of raising the consumption tax rate is to fund ballooning social security costs in pension, medical care and nursing services.These costs will only increase as the nation's society grays and birthrate declines.
After storming into power in September, the DPJ insisted it would find the money to fund its policies by weeding out wasteful spending. However, efforts to cut government fat had less of an impact than expected on the fiscal 2010 budget compilation.
The consumption tax, which imposes a financial burden on a wide spectrum of people, is the only stable tax revenue source, given that income and corporate tax revenues can fluctuate greatly, depending on the state of the economy.
If the government can restore the social security system through a consumption tax increase, it also would help stimulate consumer spending as the public would be more willing to buy things if they did not have so many anxieties about their future.
Lower corporate tax rates
Discussions on tax reform should aim to create a society free from concerns by stabilizing the public finances and social security, as well as maintain economic vitality.
Japan's effective corporate tax rate is more than 40 percent, far higher than the average of 26 percent among the 30 member states of the Organization for Economic Cooperation and Development. We think the government should quickly lower corporate tax rates as this will strengthen Japanese companies' international competitiveness.
To make up for expected tax revenue shortfalls, the government must expedite discussions on tax system reform for fiscal 2011, including streamlining tax incentives that have run their course.
During the election campaign, Kan suggested strengthening the progressive taxation system, under which high-income earners and others bear heavier tax burdens.
However, the maximum income tax rate already stands at 40 percent, which is high by international standards. Because this rate is applied to only a few taxpayers, no visible tax revenue increase can be expected from Kan's plan. Rather, the prime minister seemed to be trying to fend off public criticism that the proposed consumption tax hike would hurt the pockets of the wider general public.
Raising the maximum income tax rate will discourage people from working hard and undermine efforts to energize the country's businesses.
Before all else, the government should review its tax deduction measures.
(From The Yomiuri Shimbun, July 14, 2010)