Japan Considers Second Sales Tax Hike
- Oct 13, 2014 | Gail Cole
The rate of sales tax in Japan increased from 5% to 8% on April 1, 2014. Another increase planned for the fall of 2015 would move the rate to 10%. Is that wise? Prime Minister Shinzo Abe must make a decision by the end of the year.
Last week, the International Monetary Fund “slashed Japan’s growth forecast and put its recession odds at 1 in 4, citing a bigger-than-expected hit from a national sales-tax increase this past April.” The IMF has stated that the second tax hike is “critical to establish a record of fiscal discipline.”
Prime Minister Abe must determine whether his country would be better off with faster growth or with speedier debt decline. As the Wall Street Journal puts it, “What’s more urgent: growing faster or paying down debt before a country grows too old to cover it?”
High government debt and an aging populace are not unique to Japan; they are mirrored in many European countries and the United States. Yet with 1 in 4 Japanese aged 65 or older and a government that is borrowing “twice the economy’s size,” Japan stands out in both categories.
The 10% sales tax rate awaiting approval by Mr. Abe may not be adequate to resolve Japan’s debt. The Japan Center for Economic Research has proposed increasing the sales tax rate to 19%. Yet others believe that growth “is everything” and that “the better way to calm investors and cut debt is to solidify Japan’s tentative recovery by generating fresh revenue and faster inflation to reduce the debt’s real value.”
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