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Sunday, June 17, 2012
Consensus on risky tax raise
The ruling Democratic Party of Japan and the two main opposition parties, the Liberal Democratic Party and Komeito, on Friday reached a basic agreement on raising the consumption tax. Although the tax raise is coupled with reform of the social security system, the agreement has failed to present a clear path to make Japan's social security system sustainable. Prime Minister Yoshihiko Noda dubbed his plan unified reform of the tax and social security systems. But the reform on the social security side is so weak that the agreed plan does not deserve to be called unified reform.
For example, under the pressure of the LDP, the DPJ agreed to weaken a plan to increase the number of irregular workers to be covered by the kosei nenkin system, a pension system for corporate workers. The DPJ's original plan envisaged covering some 450,000 irregular workers. But the agreed plan will cover only less than 300,000 irregular workers. A plan to reduce pension benefits for high-income people was also postponed.
Since Japan is facing serious economic difficulties, it is important to build a social security system that not only serves as a reliable safety net for needy people but also is sustainable. Regrettably, Mr. Noda failed to pay sufficient attention to this issue.
It is bizarre that Mr. Noda is preoccupied with raising the consumption tax to the point of almost disregarding important promises the DPJ made in the 2009 Lower House election, which brought the DPJ to power.
He is so preoccupied with the consumption tax raise that he has failed to tackle things that must be done before raising the tax, such as reducing wasteful use of public money, drastically reforming special budgets and independent administrative agencies, and breaking vested interests of bureaucrats.
Under the agreement, the consumption tax will be raised from the current 5 percent to 8 percent in April 2014 and to 10 percent from October 2015. Mr. Noda says that the tax raise will contribute to reconstructing Japan's state finance ridden with huge debts. But an estimate shows that if the tax rate is doubled, a family of parents and two children with an annual income of ¥4 million will have to pay an additional ¥163,500 in consumption taxes. In addition, the taxable income deduction for a family with minor dependents will be abolished and pension premium payments will be raised.
Although the doubling of the consumption tax rate is expected to bring in ¥13.5 trillion in revenues, a possibility cannot be ruled out that the dwindling of domestic demand by the tax raise could wreck the economy. The tax raise plan, when a global economic crisis is feared due to the European sovereign debt crisis, carries great risk.