TOKYO – As October began, Japanese Prime Minister Shinzo Abe announced that his government would raise the country’s consumption-tax rate from 5% to 8% next April, and presumably to 10% 18 months after that. The contrast with what is now happening in the United States could not be sharper. As US President Barack Obama’s domestic opponents resist his signature health-care legislation, owing to the wealth transfers that it implies, Japanese bureaucrats are trying to recover the authority to administer tax revenue to support social-welfare programs.
There are many arguments for raising Japan’s consumption-tax rate. Japan’s government has a huge debt burden, and its consumption-tax rate is far lower than the value-added-tax rates that prevail in Europe. At the same time, the effective corporate-tax rate in Japan is higher than it is elsewhere, making it difficult for Japan to attract investment, foreign or domestic. In order to survive international tax competition – and thus be able to rely on corporate taxes as a source of revenue – Japan’s corporate-tax rate should be lowered in the long run.