If You Ask Me November 2013

Death and Taxes

Looming rate hike a threat to leaders and citizens

It was Benjamin Franklin who said that nothing in this world is certain “except death and taxes”. Sometimes, taxes—or their introduction—have been the death of politicians seeking to promote them.

Take as an example the UK poll tax debacle that dealt a fatal blow to Margaret Thatcher’s leadership of the Conservative Party.

So all eyes are on the reaction to Japanese Prime Minister Shinzo Abe’s plan to increase the already unpopular consumption tax from the current 5% to 8% next April, and subsequently to 10% in the autumn of 2015.

According to the Dai-ichi Life Research Institute, as quoted in The Japan Times of 3 October, the immediate additional burden on households as a result of the April increase will amount to a staggering ¥8trn.

To be more specific, a household with an annual income of ¥7.5–¥8mn currently pays ¥163,715 in consumption tax each year. It will now have to pay ¥254,668. In 2015, that will increase to ¥312,547, a virtual doubling of what that household shells out today.

In an effort to ease the impact of the tax hike, in September the administration announced an Abenomics economic package worth ¥5trn, ostensibly to encourage corporations to raise wages.

But there is no guarantee that will happen. Indeed, a recent poll conducted by Kyodo News suggests that 48.5% of the more than 1,000 respondents do not view the package positively. Only 36.1% of those surveyed are optimistic.

Furthermore, the increase comes in the wake of recent reductions in child-rearing allowances, increases in pension premiums, and the introduction of a special income tax designed to pay for repair work following the 2011 triple disaster in the Tohoku region.

Perhaps unsurprisingly, the opposition parties have been quick to criticise the stimulus package, with former Prime Minister Yoshihiko Noda of the Democratic Party of Japan (DPJ) describing it as “pork-barrel spending”.

At the same time, some opposition members acknowledge that a rise in the consumption tax rate is inevitable, given the current economic climate.

The tax hike was approved in 2012 through legislation agreed on by the DPJ, then a ruling party; the Liberal Democratic Party (LDP), part of the opposition at that time; and the LDP’s partner New Komeito. Generally speaking, the smaller opposition bodies such as the Japanese Communist Party and the Social Democrats have been entirely against the increase.

It is not only the Japanese who are watching to see whether Abe’s plans will bring about the results for which the policy is designed; foreign commentators are also looking on with interest.

Frank Packard, a long-term Japan resident, is concerned. He is the president of Triple A Partners Japan Co. Ltd., an investment advisory firm based in Tokyo.

“By itself, the sales tax increase is probably insufficient to increase wages”, said Packard. “As in many countries, economic factors in Japan are as much about emotions and confidence as they are about government policies”.

Packard believes that if the policies initiated by Abe ultimately lead to heightened business confidence, then wages will rise.

“Let’s not forget that Abe is a career politician. Most likely, he described the reasons for his decisions based on their appeal to voters rather than any sound economic theories”.

Some observers have suggested that the two-stage approach to raising taxes is insufficient.

The immediate introduction of the higher rate, but with exceptions on certain items such as everyday necessities, could, they argue, be more effective. But Packard warns that the idea of exemptions could be dangerous; once leaders begin to make them, where to draw the line?

“It’s true that in the UK, where the consumption tax [VAT] is currently 17.5%, foodstuffs and various other items are exempted. But that’s probably not going to happen here. The main issue driving the sales tax rise is the need to increase sources of revenue for the Japanese government so that it can start to reduce the huge outstanding government debt”, he said.

Packard also believes that, in general, Japanese politicians see the rise as broadly based with few loopholes, a burden that is shared by everyone in the country.

The last time there was a hike in the consumption tax, from 3% to the current 5%, a number of other measures somewhat softened the blow; there were income tax cuts, for example.

But this time there are no such sweeteners and the consumer has been seeing disposable income shrink year on year.

As almost always occurs in such cases, residents surviving on low incomes and the elderly living on fixed pensions are likely to be the hardest hit.