Gov't may hike consumption tax for reconstruction

The Japanese government is considering raising the consumption tax from 5 percent to 8 percent to pay for reconstruction from the March 11 earthquake and tsunami. The government estimated the damage caused by the disaster could amount to 25 trillion yen (more than $300 billion).

The Democratic Party of Japan is in favor of raising the consumption tax by 3 percent starting in April 2012, the beginning of the next fiscal year.

I generally think people who oppose paying taxes are crackpots. Most people are wary of their bureaucracies, and no one likes paying their hard-earned money to the government, which is why many people oppose taxes. But there is virtually no consensus on how the government can effectively save money, because that would entail cutting programs that many see as necessary. And sometimes the government needs to raise taxes in order to pay for necessities. However, I don’t think raising the consumption tax is the best way to do that.

Consumption tax is a regressive tax, meaning that it hurts the poor more than it hurts the rich. Someone living paycheck-to-paycheck has very little money left over to save. They spend nearly 100 percent of their disposable income on necessities, which means they are spending 5 percent of their disposable income in consumption tax. Top-earners, however, who have enough disposable income to pay for all their necessities, luxuries, and still have money left over to save, are spending less than 5 percent of their disposable income in consumption tax (even though the absolute amount of consumption taxes paid may be well more than what the low-income earner paid). In effect, low-income earners pay a higher percentage of their income in consumption taxes than high-income earners.

Taxes are already unbelievably high in Japan. As a junior high school teacher making a little more than $43,000 a year (the following numbers are given in American dollars, note that the yen is strong against the dollar at the moment), between national, prefectural and municipal taxes, I pay more than 30 percent income taxes. Even though the cost of living in Japan is about twice what it is in the U.S., I still manage to save some money, but I still pay almost 5 percent of my disposable income in consumption taxes. I don’t own a car, so I don’t have to pay the $120 to $600 annual tax, or the mandatory inspection fees, which are between $1200 and $2400 every other year, or weight tax, which is between $90 and $600 every other year. And since I live in an apartment, I don’t have to pay property tax.

If the government does have to raise taxes, I’d propose a raise on property tax, which is relatively low. Property taxes are probably the most fair tax, since people tend to buy homes that reflect their actual incomes. However, a property tax hike would hurt the wealthy more than the poor. Since Japan’s lawmakers mostly come from the ranks of the ridiculously rich, they are unlikely to pass any legislation that would hurt themselves. In Japan’s pseudo-democracy, where there are no direct elections at the level of prime minister, most people feel powerless in directing their government, and are largely apathetic to politics. Hence, the government can do as it likes with little fear of repercussions from the public.

The proposed 8 percent consumption tax is supposed to last for three years. I don’t see it ending though. When a government raises taxes, it rarely lowers them. A lot of construction jobs will be created by the tax hike. And in Japan, as in the U.S., once the government creates a job, it is virtually impossible to cut it. All the money allocated for the reconstruction will need to be spent. And since the tax will likely never go away, the new construction jobs won’t either, which means the Japanese can look forward to a landscape covered with even more concrete (See images below).