When Japan raises its sales tax to 8% from 5% in April, it won’t set any international records in terms of the size of the increase or the amount levied (Norway, for example, has a 25% sales tax on certain items). But economists say other countries should take note of one unique aspect of Japan’s taxation: which source of tax income is the biggest.
Private economists’ and government predictions show that after the new levy is introduced, Japan’s higher sales tax will bring in more revenue than the other two pillars of the Japanese tax system: income and corporate taxes.
That would make Japan the only Group of Seven country for whom the biggest source of general tax revenue is a consumption tax.
Unlike the Japan of the near future, most developed countries rely heavily on direct income taxes to keep things running. Economists argue, however, that consumption taxes will be increasingly important sources of revenue as populations age and pension and medical costs rise.
“Japan’s experience in raising the consumption tax will set an important example for other countries,” International Monetary Fund economists wrote in a 2011 paper when the idea of the tax was still being debated. “Many advanced economies face the same challenge to lower public debt ratios over the medium term and address rising social-security spending while at the same time preserving growth—but they will face it somewhat later, making Japan something of an early test case.”
The consumption tax has typically brought in about ¥10 trillion ($102 billion) of tax revenue annually over the past decade in Japan, and the politicians predict a three percentage-point rise in the sales tax will bring in an additional ¥7.5 trillion. In contrast, income tax revenue has averaged ¥14 trillion annually and the corporate tax ¥9.5 trillion over the past 10 years.
One of the merits of the sales tax is that it spreads the tax burden more equally across generations than other taxes. That’s big in Japan, where people over 60 who aren’t making that much money, but hold 60% of the household financial assets and aren’t afraid to spend. Consumption by elderly households will exceed ¥101 trillion this year, NLI Research Institute says.
Second, when income and corporate tax revenue are hit by an economic downturn, you can count on the sales tax. That’s key in an aging society where the government has to count on steady revenue to support social security spending, Nomura Securities senior economist Shuichi Obata said.
“It’s like a built-in stabilizer for tax revenue,” Mr. Obata said. “Household spending doesn’t take that much of a hit from changes in overall conditions compared with a tax like the income tax.”
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