Japan Press Weekly

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2008 October 22 - 28 [ECONOMY]

Raising consumption tax is suicidal for domestic demand

Akahata editorial (excerpts)

The ruling parties are considering an “interim tax reform plan” that includes an increase in the consumption tax at the direction of Prime Minister Aso Taro.

They are reportedly envisaging a period of economic recovery over the next three years to carry out tax cuts and raise the consumption tax rate to more than 10% by the mid-2010s from the present five percent.

The government and the ruling parties are attempting to implement a tax cut plan to be added to their stimulus package, but it is mainly aimed at serving the interests of large corporations and a handful of wealthy people through tax breaks on capital gains from securities sales and on capital investment.

Tax cuts over just one year

For ordinary people, the government seeks to implement a two-trillion yen fixed-amount cut in income and residential taxes for just one year. This is far from helping ordinary people to recover 3.3 trillion yen that they were forced to pay additionally each year due to the abolition of the “fixed-rate tax cuts”.

What is more, the one-year tax cuts will actually cause a tax increase because higher tax rates will be imposed in the following year. In anticipation of this, many households will likely save rather than use the money they acquire as a result of the one-year tax cuts.

A five percent consumption tax increase in three years will cost the public an unprecedented additional 10 trillion yen. At a time when national income and personal spending are in decline, if the government decides to increase the consumption tax, it will have a severe impact on domestic demand.

Negative effects of the present worldwide financial crisis that started in the U.S. are rippling through the real economy in Japan. Declines in domestic demand will be prolonged. Although domestic demand must be restored to help the country’s economy recover, the government has come up with a suicidal measure by pushing down domestic demand.

Consumption tax hike hurts ordinary households the most

The government has cut back social welfare services in inverse proportion to the introduction of the consumption tax and its subsequent increase.

In the past decade, the government has used seven trillion yen a year to help reduce the financial burden on large corporations and the wealthy through corporate tax breaks and lower tax rates on capital gains from securities sales.

Forcing lower-income earners to shoulder heavier burdens, the consumption tax is a regressive tax that depresses domestic demand and increases hardships on ordinary people.