In its latest economic survey of the country, the organisation said the government should focus on consumption tax as a key source of additional revenue.
Showing some similarities to Japanese Prime Minister Naoto Kan’s proposal in 2010 to increase the consumption tax rate from 5% to 10%, the survey suggests an increase of five to nine percentage points to balance the primary budget.
Raising the consumption tax rate is “not popular among the voters”, says Yushi Hegawa, partner at Nagashima Ohno & Tsunematsu. But the OECD’s suggestion is “understandable, given Japan’s current significant budget deficit, as well as the rising social security costs.”
The OECD considers the negative impact of consumption tax on economic growth as minimal, relative to the effect of direct taxes on household and corporate income.
Despite the regressive nature of indirect tax, the negative effect can be mitigated by policies to assist low-income individuals. But, such measures would still increase the deficit, causing the government to cut spending elsewhere or propose further tax increases.
The survey indicates that doubling the consumption tax rate to 10% is only the first step towards achieving a sustainable fiscal position.
To create the 3% of GDP surplus that is necessary to stabilise Japan’s debt ratio, the OECD suggests that, in addition to the initial doubling of the consumption tax rate, another six percentage-point increase is required. If implemented, this would push Japan towards the 20% consumption tax average in Europe.
Regarding Japan’s New Growth Strategy, the OECD suggests, in addition to targeting cuts in greenhouse gases, the use of environment-related taxes could also be a useful tool in generating revenue for fiscal consolidation. The OECD is keen on the idea of introducing a carbon tax in areas not covered by the emissions trading system (ETS).
“I don’t think it is a good idea”, says Hegawa. “[A carbon tax] will significantly decrease Japan’s international competitiveness. Corporate taxpayers engaged in the manufacturing industry will heavily oppose this”, he adds.
