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Project Syndicate: Japan's Tax-Hike Test

Author: Koichi Hamada
October 24, 2013

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"If Japan's government can overcome a demand setback after the tax increase takes effect – leaving the economy functioning smoothly and initiating a recovery in government revenue – Abe will be able to declare Abenomics an unequivocal success."

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.

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