Distortion of Tax Policy

The question for Prime Minister, Shinzo Abe, was not about whether do it or not, but where the tax money goes. As he decided to raise consumption tax rate next April, he is showing his willingness to take measures for stimulating economy, in a manner of returning tax money to economy. Basically, the primary purpose of this tax hike was to stabilize social security system. It will be an unprecedented distortion of tax policy.

Abe administration reportedly considers delivering policy package for economic stimulus, at the same time when he officially announces the tax hike on October 1^st. The officials explained that they needed to do something for easing the impact on economy. Total amount of fiscal spending for that is regarded as ¥5 trillion, or $50 billion, worth of 2% out of expected surplus with the tax hike by 3%. Actual income from the tax hike, therefore, should be only 1%, the level which some of Abe’s personal advisers have been recommended.

The bills for raising the rate of consumption tax were passed in the Diet under the administration of Democratic Party of Japan last year. The cause for them was to maintain social security system, which has long been suffered from expansion of spending and income shortage in foreseeable future. Abe’s economic policy is turning down that idea and pouring two-thirds of the additional income by the tax hike into some part of economy, supposedly old-type infrastructure industries which consist of political basis of Liberal Democratic Party.

Ministry of Finance, the organization of fiscal fundamentalists, basically opposes this initiative laid by Prime Minister’s Residence. If the package expands with various requests from business community, it will be highly possible that the policy ultimately needs more issuance of national bonds, making fiscal balance of the government worse. Additional accumulation of national bonds may lead to further incredibility of Japan economy. Actual estimate of MoF for the stimulus was around ¥2 trillion, or $20 billion.

What Abe is worrying about would not be the future of Japan economy, but his political future. His biggest concern is how the tax hike damages his fundamental political resource: popularity. If he loses political power by economic decline caused by the tax hike, he will not be able to reach his more important goals, which are constitutional amendment, strengthening Japan in terms of military power, visiting Yasukuni Shrine regardless of neighbors’ opposition, or justifying Japan’s activity in World War II including hiring comfort women. After all, it is his personal struggle for his honor.