Consumption Tax Issue Heats Up in Japan

January 19, 2011 Taxation in Japan

Watermark on Japanese 10,000 Yen Note, Macro PhotoConsumption tax rates have once again risen as a political battlefield in Japan, with the Prime Minister leading the charge for a raised tax rate and widespread reforms to the country’s tax system.

On January 18th Finance Minister of Japan Yoshihiko Noda announced that the Government would attempt to instate a range of sweeping tax system reforms by March 2012, in an attempt to increase long-term tax revenues, and reduce the national health-care and social security costs. The Minister did not reveal what changes are envisioned, but he explicitly stated that an increase to the current 5 percent consumption tax rate would be sought, along with an array of spending cuts.

On the same day, the Prime Minister Naoto Kan made an even more ambitious promise, saying that cross-party negotiations for tax change would yield positive results by June 2011. Naoto Kan also reaffirmed that alongside consumption tax rate, the Government will need to closely examine the future of the national social security system. According to the National Policy Minister Koichiro Genba, a meeting of government ministers has already been scheduled for January 19th, in which initial discussions will be held about a raised consumption tax, and what other changes need to be carried out in order to best benefit the Japanese economy.

Reactions to the new renewed push for a raised consumption tax and tax reforms are mixed. On January 18th the Industry Minister Banri Kaieda said if Naoto Kan wishes to instate a higher consumption tax rate, a general election would need to be called to maximize any chance of success. However, local political analysts were more optimistic regarding the possibility for tax changes, pointing out that the proposal for a higher consumption tax rate and large-scale tax overhauls was originally suggested by the now-opposition Liberal Democratic Party, and Naoto Kan could potentially exert political pressure on the party to help fulfill their own earlier promises.

Photo by Ivan Walsh