SECOND MEETING OF THE OECD GLOBAL FORUM ON VAT The History and Development of the Consumption Tax policy in Japan April 2014 Hidemasa Nakamura Director for Coordination Division, Tax Bureau, Ministry of Finance, Japan
Outline Fiscal situation and the role of the consumption tax in Japan History of the consumption tax policy Introduction of the consumption tax (1989) First consumption tax rate hike (1997) Second consumption tax rate hike(2014) Future steps Questions 2
Trends in General Account Tax Revenues, Total Expenditures and Government Bond Issues (in trillion yen) 120 100 80 60 40 20 0 20.9 17.3 15.7 13.8 38.8 34.1 43.4 26.9 24.5 29.1 23.7 21.9 57.7 50.6 51.5 53.0 53.6 46.9 47.2 41.9 38.2 34.9 32.4 29.0 30.5 13.5 14.2 12.9 14.0 13.5 12.8 12.3 11.3 10.7 9.6 7.1 7.0 7.0 7.0 6.8 7.2 6.4 6.3 5.3 5.0 6.3 6.2 3.7 3.2 2.1 3.5 4.5 4.3 6.3 7.2 5.9 7.0 6.7 6.4 6.0 5.0 50.8 46.8 9.4 78.8 78.5 75.1 75.9 73.6 69.3 70.5 70.5 65.9 61.5 60.1 59.8 54.9 Tax revenues Special Deficit-Financing Bond Issues Construction Bond Issues 7.2 6.6 6.3 6.7 6.9 6.2 6.4 6.3 6.7 2.5 1.0 0.2 54.4 54.1 51.0 51.9 52.1 53.9 49.4 50.7 51.0 47.2 47.9 49.1 49.1 43.8 43.3 45.6 9.5 9.5 16.2 16.2 13.2 12.3 18.4 16.4 0.8 2.0 19.9 10.7 18.5 9.9 9.2 8.5 89.0 89.3 84.4 84.8 83.7 84.9 85.5 82.4 34.0 17.0 16.9 37.5 13.2 24.3 Total Expenditures 33.0 11.1 30.0 9.1 21.9 20.9 35.0 35.3 35.5 9.1 25.8 6.7 8.7 28.7 26.8 31.3 7.8 23.5 81.4 81.8 27.5 6.4 25.4 6.0 21.1 19.3 84.7 44.3 33.2 7.0 26.2 101.0 52.0 15.0 38.7 41.5 42.8 36.9 95.3 100.7 97.1 98.1 95.9 42.3 42.8 7.6 8.4 50.0 47.5 45.4 43.9 42.9 41.3 11.4 7.0 6.0 34.7 34.4 36.0 35.8 35.2 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 (FY) (Note1)FY1975-2012: Settlement, FY2013: Including supplementary budget, FY2014: Budget (Note2)Following various bonds are excluded: Ad-hoc Special Deficit-Financing bonds issued in FY1990 as a source of funds to support peace and reconstruction activities in the Persian Gulf Region, Tax reduction-related Special Deficit-Financing bonds issued in FY1994-1996 to make up for decline in tax revenues due to a sereis of income tax cuts preceding consumption tax hike from 3% to 5%, Reconstruction bonds issued in FY2011 as a source of funds to implement measures for the Reconstruction from the Great East Japan Earthquake, Pension-related Special Deficit-Financing bonds issued in FY2012,2013 as a source of funds to achieve the targeted national contribution to one-half of basic pension. 3
(%) 240 210 180 150 120 90 60 Government Financial Liabilities and Household Financial Assets General Government Gross Debt (International Comparison) Italy France U.K. U.S. Canada Germany Trends in General Government Financial Liabilities and Household Financial Assets (unit : trillion yen) 1,800 Japan 1,600 1,400 1,200 1,000 800 600 400 Household Gross Financial Assets Household Net Financial Assets General Government Gross Financial Liabilities 1,579 1,218 1,124 616 30 200 General Government Net Financial Liabilities 0 1999 2001 2003 2005 2007 2009 2011 2013 (Source) OECD Economic Outlook 94 (November, 2013) (Note)Figures represent the general government-based data (CY) 0 (Note1) The data are as of the end of FY. (Note2) Household Net Financial Assets : Some liabilities such as home mortgage are excluded from gross financial assets. (Source) The BOJ (Bank of Japan) Flow of Funds Accounts (published Mar. 2014. ) 4
Aging Population Ratio of People Older than 65 years to the Total Population Japanese Life Expectancy 1961 1973 2012 Life Expectancy (male) Life Expectancy (female) 66.0 70.7 79.9 70.8 76.0 86.4 Life Expectancy at age 65 (male) Life Expectancy at age 65 (female) Life Expectancy at age 75 (male) Life Expectancy at age 75 (female) 11.9 13.2 18.7 14.1 16.1 23.8 6.7 7.4 11.6 7.8 9.1 15.3 (Source) Japan 1950-2010: National Census (Ministry of Internal Affairs and Communications) 2011-2050: Japanese Future Demographic Projections (National Institute of Population and Social Security Research) (January, 2012) Other countries: World Population Prospects: the 2012 Revision (United Nations) (Source) Abridged Life Tables 2012 (Ministry of Health, Labor and Welfare) (July, 2013) 5
Balance between beneficiaries/contributors in social security system is getting vulnerable 65 or older <1965> <2012> <2050> Taking measures for the elder to work longer 20-64 ^^ ^^ ^^ ^^ ^^ ^^ ^^ ^^ ^^ > < - - ; - - ; - - ; 1 : 9.1 1 : 3 1 : 1.2 ^^ ^^ need to increase the supporters by social security reform Population (component ratio) 618 (6.3%) 5,608 (57.1%) 3,083 (24.2%) 7,415 (58.2%) 3,768 (38.8%) 4,643 (47.8%) 3,602 (36.7%) 2,252 (17.7%) 1,297(13.4%) 1965 2012 2050 65 or older (Source) Population Estimates and National Census (Ministry of Internal Affairs and Communications), Population Projection for Japan (middle fertility and mortality projection) (National Institute of Population and Security Research) 20-64 19 or younger ^ ^ 0 ^ ^ 0 Support of childcare etc. 6
Social Security Benefits 7
The role of the consumption tax Characteristics of consumption tax Stable revenue source Neutral for economic activities Large amount of revenue Maintenance of the social security system and Fiscal consolidation; To achieve these two goals simultaneously, make use of the consumption tax as a main resource for tax revenues. In fact, during the introduction and twice rate hikes of consumption tax, we had gone through difficult and winding paths. 8
Frequency of the consumption tax rate hikes - international comparison 9
Pre-history of the consumption tax From the accession to OECD to the present In 1964 Accession to OECD +25years later In 1989 Introduction of the consumption tax(3%) +25years later In 2014 Second hike of the consumption tax rate(8%) History to Introduction Comparison of tax revenues (in trillion yen) Tax Revenue in General Account Individual Income Tax Corporate Income Tax Commodity tax etc. FY 1975 13.7 5.5 (39.9%) 4.1 (30.0%) 0.8 (5.5%) Need to shift the balance from direct taxes to indirect taxes 1978 Consideration of General Consumption Tax by LDP Election rout recalled 1987 Submission of the bill of Sales Tax by LDP Abolished Cause of the above failure:unpopularity among salaried employees and small/medium businesses 10
Introduction of the consumption tax Introduction of the consumption tax 1988 Submission of the bill of the consumption tax act by LDP Approved by the Congress 1989 Introduction of the consumption tax Contents of the tax reform Introduction of consumption tax: 3% Simple requirement for keeping books and/or bills without introducing invoices Special measures for SMEs:exemption threshold, simplified tax scheme Individual income tax cut: decreasing tax rate, expanding deductions (ex. basic deduction) Corporate income tax cut :staged decreases of tax rate (42% 37.5%) Comparison of tax revenue (in trillion yen) Tax Revenue in General Account Individual Income Tax Corporate Income Tax Consumption tax (Commodity tax etc. ) FY 1990 60.1 26.0 (43.2%) 18.4 (30.5%) 4.6 (7.7%) FY 1975 13.7 5.5 (39.9%) 4.1 (30.0%) 0.8 (5.5%) Note: Commodity tax was abolished when the consumption tax was introduced. 11
First consumption tax rate hike (1997) - 1 Steps toward the consumption tax rate hike 1994 Consideration of National Welfare Tax by SP coalition forces Recalled 1994 Submission of the bill of the consumption tax rate hike by LDP coalition forces Approved by the Congress 1997 Consumption tax rate hike Contents of the tax reform Consumption tax rate hike (3% 5%) Reduction of special measures for SMEs : lowering exemption threshold, narrowing simplified tax system Individual income tax cut:introducing special tax reduction, reducing progressivity of the tax rate, expanding deductions (ex. basic deduction) Comparison of tax revenue (in trillion yen) Economic Depression Nominal GDP (in trillion yen) Real growth rate (%) FY 1996 515.9 2.7 FY 1997 521.3 0.1 FY 1998 510.9 1.5 FY 1999 506.6 0.5 Tax Revenue in Individual Corporate Consumption tax General Account Income Tax Income Tax (Commodity tax etc.) FY 1998 49.4 17.0 (34.4%) 11.4 (23.1%) 10.1 (20.4%) FY 1990 60.1 26.0 (43.2%) 18.4 (30.5%) 4.6 (7.7%) FY 1975 13.7 5.5 (39.9%) 4.1 (30.0%) 0.8 (5.5%) Note: Commodity tax was abolished when the consumption tax was introduced. 12
Trends in Real GDP and Private Consumption before and after the Increase of the Consumption Tax Rate in 1997 13
Second consumption tax rate hike(2014) Steps toward the second hike 2009 Enactment of the Program Act(Aso cabinet) Change of the government 2012 Enactment of the Act on Comprehensive Reform of Tax System Change of the government 2014.4 5% 8% 2015.10 8% 10% 2014 Consumption tax rate hike 5% 8% Contents of the tax reform Using the consumption tax revenue as a main resource for the social security Raising top rate of the individual income tax Taking economic measures (about 5 trillion yen) Measures for alleviating the consumption tax burden on the purchase of houses Measures for activating of private investment (ex. R&D tax credit) Measures for smooth pass-through of the increased consumption tax on sales price Background: SMEs have shown concerns that they would suffer from being beat down of prices by large enterprisers or rise in prices of their commodities and services would not be accepted by consumers. Act for the measures to ensure the smooth and proper shifting of the tax increase to prices (ex. establishment of G-men for pass-through and over 150 thousands of investigations) Measures for low-income households This theme will be presented by Director Ito(Session 6). 14
1.2 1.0 0.99 0.94 International Comparison of VRR among OECD Countries VRR (Vat Revenue Ratio) = Vat Revenue (Consumption Expenditure-Vat Revenue) Standard 0.8 0.71 0.69 0.69 0.68 0.67 0.6 0.63 0.60 0.60 0.59 0.58 0.56 0.55 0.55 0.55 0.55 0.52 0.50 0.49 0.48 0.48 0.48 0.48 0.47 0.46 0.46 0.46 0.4 0.43 0.41 0.41 0.37 0.32 0.2 0.0 (Source)OECD"Consumption Tax Trends 2012", "Revenue Statistics 1965-2012" and "National Accounts " 15
Future steps During the introduction and twice rate hikes of the consumption tax, we had gone through difficult and winding paths; however, Single rate structure has been maintained. Special measures for SMEs have been diminished. The efficiency of Japanese consumption tax is fairly well. However, rate is still low. Future By the end of this year: final judgement of the consumption tax rate hike from 8% to 10% in October 2015. By FY 2020: Accomplishment fiscal consolidation target(achieving a primary surplus) Based on the experience about the introduction and hikes of the consumption tax, the consumption tax policy is discussed discretely among politicians. The People are sensitive to economic conditions and issues of price rise. However, considering the fiscal situation and the rapid aging of the population, raising the consumption tax rate is necessary. 16
Questions Have you ever gone through similar difficulty in raising the consumption tax? In a political context, are consumption tax rate hikes impressed favorably or unfavorably? In case oppositions exceed supports about raising the consumption tax rate, what sort of measures have you taken? Have the measures succeeded or failed? 17