Japan Raises Sales Tax Rate

Japan raised its sales tax from 5 percent to 8 percent effective yesterday, April 1st. The rate is set to increase, again, to 10 percent in October of 2015.

The last time the Japanese increased their sales tax rate in 1997 from 3 percent to 5 percent, the economy entered a deep recession.

On the heels of the tax increase, the Bank of Japan released the results of its tankan survey, which measures businesses sentiments on the economy, and showed that companies expect spending to slump following the tax hike.

Japanese firms expect to increase capital spending by only 0.1 percent in the new financial year, which started this month. This points to the larger issue: not Japan’s increasing sales tax rate, but its high corporate tax rate. High corporate tax rates depress investment, which slows economic growth.

Previous discussions in Japan involved an increase in the sales tax in exchange for a lower corporate tax rate, which is currently the second highest in the world behind the U.S. at 37 percent.

Whether or not sales tax-corporate tax rate tradeoff materializes, the sales tax increase to 8 and then 10 percent marks a shift towards consumption taxes as a means to raise revenue.

This is in line with countries from across the developed world that have been making a shift towards consumption based taxes and away from income taxes. Many of these countries have relatively large governments and sales taxes, such as value added taxes (VATs), are less economically distortive ways to raise revenues than reliance on an income tax.

Over the last 30 years, many developed countries have reduced their corporate income taxes, while relying more heavily on consumption taxes, such as the VAT.

While a VAT is not likely, and for many reason is not desirable, in the U.S., taking steps to shift away from income taxes on businesses and individuals and towards neutral and pro-growth tax policy would be a good change for the U.S. and Japan.