Prime Minister Shinzo Abe on Oct. 1 announced his go-ahead for the consumption tax rate to be raised from the current 5 percent to 8 percent, effective next April.
This will be the first increase since April 1997, when the rate went up from 3 percent to 5 percent. Back then, the hike was accompanied by a reduction in income and other taxes to alleviate the impact on households. But not this time. With revenues from the higher tax rate projected to exceed a whopping 8 trillion yen ($81.6 billion), the increase is unprecedented. It will significantly add to the financial burden on households.
REFORM OF SOCIAL SECURITY AND TAX
In spite of this, we believe there was no other option due to the pressing need to try anything to fix the nation's debt-ridden fiscal mess and establish a sustainable social security system.
We must return to the basic principle of integrated social security and tax reform.
Japan's national debt, a significant part of which constitutes government bonds, has exceeded 1,000 trillion yen, roughly double Japan's gross domestic product. More than 40 trillion yen, or nearly half of this fiscal year's general account budget, is financed by newly issued government bonds.
Ballooning social security costs brought on by the graying of society represent the primary reason for this fiscal quagmire.
Insurance premiums and co-payments by policyholders are no longer sufficient to cover health and nursing care costs and pension payments. The central government, along with local entities, keeps footing massive bills. Social security costs continue to bloat by around 1 trillion yen every year.
We just cannot keep passing our debts to future generations to cover current deficits in the social security budget. If we are to stabilize the social security system and avert a fiscal crisis, there is no choice but for us to shoulder a bigger tax burden.
But why raise only the consumption tax rate when there are so many other taxes?
Social security payments are made mostly to senior citizens, whose ranks are swelling to the point that they represent a significant portion of the overall population. It just doesn't work anymore to keep relying only on income taxes paid by working age citizens.
Moreover, wages are not growing. Yet, people are saddled with all sorts of expenses; for example, raising and educating their children, mortgage payments and house rent. Unless working age people receive greater support, the nation's population decline could accelerate.
Given these factors, the consumption tax levied on all consumers promises stable revenue, which makes it an ideal funding source for social security.
At the same time, heavier income and inheritance taxes should be levied on wealthy citizens. This would also help shrink the gap between the rich and the poor. But it is not realistic to rely on those tactics alone to secure funding comparable with what a higher consumption tax would generate.
QUESTIONABLE CORPORATE TAX CUTS
The government is responsible for collecting taxes properly and distributing tax revenues effectively, not squandering them. At the same time, it has to induce economic growth through deregulation and other means. Unless the government lives up to its responsibility in all these aspects, it should not expect the public to accept the higher consumption tax rate.
Yet, the Abe administration has gone in the opposite direction by adopting a 5-trillion-yen economic stimulus package, which it says is intended to counter an expected economic slowdown resulting from the tax increase.
Since the consumption tax increase will seriously affect people with low incomes, they will need financial assistance. So, we understand the government's decision to appropriate funds for that purpose in its supplementary budget.
But what we cannot understand is the decision to make corporate tax cuts the centerpiece of the stimulus package.
Despite strong opposition from even within the ruling coalition, the Abe administration is moving to abolish special corporate taxes, which are earmarked for the reconstruction of areas devastated by the Great East Japan Earthquake and tsunami, one year earlier than scheduled. It also intends to accelerate discussion over whether to lower the corporate tax rate even further.
Businesses drive the economy and provide employment. There is no question that the global trend is for lower corporate taxes.
Businesses, excluding financial institutions, hold an estimated 220 trillion yen in cash and savings alone, according to Bank of Japan statistics. But many companies have no intention of spending their amassed capital, even when their profits are up.
This situation has got to change. The prime minister's plan is to use the corporate tax cut as his card for demanding wage increases. But before Abe goes ahead with the uniform tax reduction that will have a heavy fiscal impact, we believe he should be focusing on measures to ease the tax burden on businesses that raise wages, provide more jobs and increase capital investment.
INTENSE PUBLIC SCRUTINY
The planned economic stimulus package also raises questions about how the money will be spent. Our biggest objection is that a lot of it will fund public works projects.
Of course, outdated and decrepit social infrastructure must be fixed quickly. But it is glaringly obvious that the Abe administration is fixated on the immediate economic stimulation that public works projects are expected to bring. And with the 5-trillion-yen outlay already set, the administration will max it out by spending as much as it wants on public works projects.
This, in our opinion, is nothing short of repeating the folly of aggravating the nation's fiscal mess by compiling supplementary budgets almost every year since the collapse of the asset inflated economy in the early 1990s.
And there are imperfections in the consumption tax system itself that need fixing.
The fundamental principle of any taxation system is that the revenue collected from the people must go to the tax offices without fail. The government must take steps to deal firmly with business operators who get to effectively keep some of the tax money paid by consumers.
We insist that an invoice system be introduced for transactions between business operators, so that the amounts of tax charged or paid are clearly shown. If the prices of goods or services are fully distinguishable from the amounts of the consumption tax charged or paid, this will clarify where and how much the tax is levied, which in turn should help prevent small and midsize business operators, who are in a weak position, from getting a raw deal.
Obviously, the lower the tax, the happier everyone is. But we pay our taxes because we believe that the government needs our tax money to implement necessary policies.
The Abe administration seems to be missing the true purpose of the consumption tax hike. The government must realize that taxpayers are watching its every move very closely.
--The Asahi Shimbun, Oct. 2
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