Japan has recently raised its consumption tax from 8% to 10%. This hike in
sales tax comes after it had been pushed back from 2015 to 2017, then ultimately ended up taking
place on October 1, 2019. The tax increase was originally pushed back due to uncertainty
in domestic and global economic conditions. It is predicted that this tax increase
will weigh heavily on the outlook Japan’s well performing economy. In the past,
sales tax increases have caused detriment to consumption in the economy, but
this time around, it is predicted to not be as bad. This may be due to the fact
that the Japanese will be eligible for a 5% rebate when using electronic
payment methods at some smaller retailers to mitigate the tax increase.
We’ve shown in
class that this consumption tax is less favorable to consumers. As their budget
line is decreased. Say Japan consumes apples and bananas (Bananas on the
vertical axis and Apples on the horizontal axis). Before the sales tax increase,
consumers budget line had a slope of Paw/(1+.08)Pbw.
So, the Japanese consumers have a less than favorable budget line than if they
were consuming at world prices. After the increase, the slope of their budget
line is dropped to Paw/(1+.10)Pbw. You
could argue that the consumers are worse off with this consumption tax, because
they are no longer able to afford to consume at the world prices with their
income. This rise in sales tax, has caused Japan’s household consumption to go down across
the board. The big question is, is that helping or hurting the economy? While
the government may be collecting more in tax revenue if consumption were to
stay the same, is the consumption tax hike worth it if consumption drops as a
result of it?
Matt, I did not realize that consumption tax had risen in Japan. I find the reasoning behind the tax hike to be very interesting. As it seems to me the government doesn't exactly need the money rather they are using it as a way of forcing people to use technology to pay. With the rebate, some will only face a 5% tax. Yes, the government did a the extra money earned will go towards public welfare including free childcare fund as well as paying off the countries debt. As for welfare of the country and spending, I am unsure of the effect to be honest. Yes consumers will be paying more on goods other than food, as those are exempt, but they will also be benefitting because childcare will eventually be free. So, perhaps in the short run, this will effect consumers negatively, however in the long run I see this as being a beneficial move because there will eventually be a boost in welfare.
ReplyDeleteAnother though(not sure if it is 100%)....This may also help with wealth distribution as it taxes most goods, except food, therefore those with more money will end up paying more as they typically spend more.
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ReplyDeleteThis is an interesting policy that Japan has come up with, especially after they lowered the consumer tax in 2015 to 2017, maybe this was not working well and they needed to stimulate the economy more as we know Japan has had a rather large economic slow down. The decrease in consumer surplus but increase in government revenue will show an interesting economic outcome in the future.
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