Japan Sales Tax Increase Could Hurt The Fragile Economy

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Japan Sales Tax Increase Could Hurt The Fragile Economy

Japan’s Prime Minister, Yoshihiko Noda took control in September 2011, has had sales tax on his agenda and finally we are seeing his party, Democratic Party of Japan, submitting a bill to increase the sales tax. The bill proposes an increase from the current rate of 5% to 8% in 2014, then to 10% in 2015. This all is for helping Japan pay off some of its debt load of 44 trillion yen ($532.1 billion) which accounts for 8.9% of Japan’s GDP.

Economists have said that a one percent point in the sales tax would bring in an extra 2 trillion yen in tax revenue. Although the sales tax increases will only put a dent in the debt load, it is a good start and it will certainly help out the debt balance.

Like the US, Japan relies on income tax as its largest source of revenue. However, the Japanese government would be making a mistake if they raised income tax rates because the working population to total population ratio has fallen to 59% at the end of 2011. Obviously, high unemployment is not the proper time to be raising income tax rates.

However, this bill has created a stark divide in the DPJ. Many Democrats just do not support new tax increases and some have gone as far to say that they will leave the party if the bill passes.

Many fear that this tax increase would throw Japan into another recession. The economy is very fragile right now and it can be easy for the recovery to suddenly reverse and go into a recession. In fact, the last time Japan raised the sales tax rate from 3% to 5% in 1997, the country fell into a deep recession in which many major banks failed. So, history is not on the Prime Minister’s side and neither are most of his party members.

This sudden worry of national deficits sparked from Europe, has other countries trying to get their debt under control. However, what these leaders do not understand is that they will be destroying their economy in the process. Economies like the US and Japan rely overwhelmingly on consumer spending. If you raise the sales tax rate, people are going to be less likely to continue to buy on the scale that they previously were.

Now you have less people buying goods and your economy is back into a recession. Global leaders need to deploy spending cuts and tax decreases at least while the recovery is in a fragile state because we do not want to go back into a recession. Once we are fully out of the recovery and everything is rosy red again, that is when you can increase sales tax and measures of that nature.

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Sheeraz Raza
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