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Thursday, Jan. 26, 2012
Tax plan ill-timed and ill-thought
Prime Minister Yoshihiko Noda made a policy speech before the Diet on Tuesday as it started a regular session for 2012. His main theme was a raise of the consumption tax and he called on opposition parties to take part in consultations on the matter with his ruling Democratic Party of Japan.
Mr. Noda stressed that the aim of the tax raise is to help keep Japan's social welfare system sustainable since social welfare spending will grow by ¥1 trillion every year. The government plans to raise the consumption tax from the current 5 percent to 8 percent in April 2014 and to 10 percent in October 2015. He made it clear that all the additional revenues from the tax raise, except the portion going to local governments, will be used for social welfare.
Mr. Noda has not made clear whether other tax revenues will also be used for social welfare. If the consumption tax comes to provide the only tax revenue for social welfare spending, the budget will lose a great deal of flexibility. He wants to avoid handing increasing debts to future generations. But the tax raise, given the current economic situation, could have a negative economic impact of deepening deflation and further delay Japan's financial reconstruction.
The government and the parties should pay serious attention to the possibility that if a tax raise plan is floated, people will tighten their purse strings to prepare for the tax raise even before it is enforced. Even if they buy up merchandise before the tax goes up, they will anyhow cut back on their spending once the tax raise goes into effect.
Decreased demand will deepen deflation, and tax revenues will decrease, the eventual effect being a further delay in the nation's financial reconstruction. Thus the planned consumption tax could greatly harm both the economy and the government's efforts to restore health to its finances.
The government and the parties also should remember that from January 2013, other taxes will be increased to raise funds for reconstruction from the March 11 disasters in Tohoku. The tax increases will include a 2.1 percent surcharge on the amount of income tax, which will continue for 25 years.
Mr. Noda said that the current social welfare system must be changed to strengthen social safety nets for working people who are financially underpinning the lives of the elderly, and to meet the need of all generations. This basic thinking is quite reasonable. But his tax raise plan would make it difficult to build a social welfare system based on this basic thinking because the tax increase will endanger economic recovery and decrease tax revenues.
Mr. Noda failed to present the social welfare system that he would like to build in concrete terms that could induce informed public discussions. People will not accept his tax plan unless he makes strenuous efforts to greatly reduce the wasteful use of tax money, including on bureaucrats' vested interests.
Apparently trying to show to people that he is making efforts to streamline government administration, Mr. Noda said that he will decrease the number of independent administrative agencies by about 40 percent through merger and abolition, and halve the number of special account budgets. Strangely, he never mentioned these measures when his administration and the DPJ were discussing the consumption tax raise plan. These measures suddenly cropped up after he was criticized for not being aggressive about reducing government waste. Characteristic is the fact that he failed to show how much money these measures will save. It is not farfetched to say that these measures are a lure to help get people to accept his consumption tax plan.
Mr. Noda said that he will study introducing a taxation and social security number system to help strengthen social security measures for low-income people and as the basis for introducing a negative income tax also to help such people. But he never mentioned how much it will cost to introduce the system and how it would be possible to prevent inherent risks such as the leaking of information on individuals and fraudulent claiming of social security and tax benefits. In the first place, it must be discussed whether a system giving particular numbers to individuals citizens is absolutely necessary if the government is to help low-income people in social security and taxation.
Apparently, as other lures, Mr. Noda said that he will slash the wages of national public servants by about 8 percent (actually 7.8 percent) and the number of Lower House seats (by 80 from proportional representation). Care must be taken that the call for the wage cuts does not lead to unreasonable bashing of public servants. Slashing the number of Lower House seats from proportional representation will suppress minority opinion. The number of national lawmakers relative to a population is not big in Japan compared with other countries. One wonders why Mr. Noda does not mention slashing state subsidies to political parties if he wants to slash wasteful use of public money.
Mr. Noda, in his speech, also failed to mention specific benefits and risks from Japan's participation in the Transpacific Partnership free trade scheme. This makes one wonder whether the government has a clear thinking about the TPP issue.