Japan Press Weekly

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2012 July 25 - 31 [FINANCE]

Consumption tax hike is in exchange for cuts in corporate taxes

Although the Noda Cabinet is going ahead with the plan to raise the consumption tax rate under the pretext of “financial reconstruction”, the real aim of the plan is to make up for tax revenue reductions caused by the corporation tax cut. It is obvious if we examine the history of the consumption tax.

The consumption tax was introduced with a rate of 3 % in 1989. In the same year, the corporation tax rate was decreased from 42 % to 40 %, and then to 37.5 % in the next year. In 1997, the consumption tax was raised to 5 % and the corporation tax was reduced to 34.5 % and 30 % in 1998 and 1999 respectively.

Japanese business circles have insisted on the consumption tax hike and the corporation tax cut as one package. At the time of the introduction of the consumption tax, the then head of the Japan Federation of Economic Organizations (Keidanren) argued at a public hearing of the Tax Commission that the government should decrease corporate tax burdens and introduce a consumption tax.

The total amount of consumption tax revenues from 1989 is expected to be about 251 trillion yen as of the end of this fiscal year. This amount roughly equals the sum of three corporation taxes revenue reductions during the same period, 233 trillion yen. The three corporate taxes are the corporation tax, the corporate inhabitant tax, and the enterprise tax on corporations.

The Upper House is debating a bill to raise the consumption tax rate from 5 % to 8 % in 2014 and to 10 % in 2015.

This year, the corporation tax rate was decreased by 4.5 % to 25.5 %. Companies will be subject to a 4.5% tax for special reconstruction from the 3.11 disaster for the next three years. However, after the three years, the government will again end up with a loss in corporate tax revenues.

The Japan Business Federation (Nippon Keidanren) seems to be still unhappy about the tax system, as it recently published a report which demands the consumption tax rate be increased to 19 % by 2025 allowing for further corporate tax cut.

It is economic suicide to impose further tax burdens on the general public in favor of major corporations.