Discussion on a multiple rate system in Japan April 2014 Yutaka Ito Director of the Consumption Tax Policy Division, Tax Bureau Ministry of Finance, Japanese Government
Outline Background Political discussion Political needs 2
Background: the introduction of consumption tax and its rate hikes 4/1989: Introduction of consumption tax (single rate at 3%) 4/1997: Consumption tax rate hike (from 3% to 5%) 3/2009: Enactment of the Program Act, prescribing implementation of fundamental tax reform which contains consumption tax rate hike 《 9/2009: LDP and New Komeito → DPJ 》 8/2012: Enactment of the Act on Comprehensive Reform of Tax System, including consumption tax rate hikes to 8% and 10% (Based on the agreement between DPJ, LDP and NK) 《 12/2012: DPJ → LDP and NK 》 4/2014: Consumption tax rate hike (from 5% to 8%) 10/2015: Consumption tax rate hike (from 8% to 10%) (stipulated by the 2012 Act) 3
Political discussion on a multiple rate system - 1 The 2012 Act The act, which stipulates consumption tax rate hikes to 8% and 10%, also stipulates that the government should consider measures to help low-income households, assuming the regressivity of consumption tax. The act states the following two options: 1. Provision of benefit / Refundable tax credit 2. Multiple tax rate system The act states that the government should introduce a simplified provision of benefit at the time of consumption tax rate hike to 8%, until either of the above options is introduced. 4
Political discussion on a multiple rate system - 2 The simplified provision of benefit According to the 2012 Act, the Japanese government has decided to provide the simplified benefit this year to low income households. - Recipients: members of the households which are exempt from the municipal inhabitant tax. - Approximate number of the recipients: 24 million (cf. the total population in Japan: 127 million) - Approximate annual income of the recipient household: Under about 2.5 million yen (about 25 thousand USD) with a spouse and two children (Note: It should be a different amount with a different family structure.) - Amount of the benefit per recipient: \10,000 (about 100 USD) based on the following calculation: (Average annual expenditure on foods per household in the bottom deciles) * (3%: additional burden by tax rate hike from 5% to 8%) / (average number of family members per household in the bottom deciles) * (1.5 years: from April 2014 to September 2015, the period between the first rate hike and the second rate hike) (reference) Annual report on the family income and expenditure survey 2012 (Ministry of Internal Affairs and Communications) http://www.stat.go.jp/english/data/zensho/index.htm 5
Political discussion on a multiple rate system - 3 The Tax Reform Plan (1/2013) announced by the ruling parties immediately after the change of government includes: ✔ A multiple tax rate system is aimed to be introduced at the time consumption tax rate is raised to 10% ✔ The following three matters will be discussed continuously: 1. How to draw lines between items for different tax rates with enough reasonability to convince the people. 2. How to finance the revenue to be lost by the introduction of a reduced tax rate. 6
Political discussion on a multiple rate system - 4 3. The Japanese consumption tax system has adopted the subtraction method, not an invoice system. If a multiple rate system is introduced in Japan, then introducing an invoice system would be necessary. How can we cope with its administrative burden for SMEs? The ruling parties had discussed the above matters in detail, conducting hearings with experts and concerned businesses, but they were unable to reach a conclusion. Then, the Tax Reform Plan (12/2013) announced by the ruling parties indicates: 1. A multiple tax rate system will be introduced when the consumption tax rate is 10%. 2. The above three matters will be discussed continuously. 7
Political needs for a multiple rate system - 1 Why does a country need a multiple rate system with a value added tax, especially at a higher rate? Does Japan need it at the rate of 10%? Possible justification for certain items might consist of some of the following points: ✔ Counter measure against regressivity of VAT for low-income households ✔ Measure to relief tax burden felt by consumers every time they purchase goods and services ✔ Consideration of daily necessities ✔ Consideration of necessities for life-support ✔ Consideration of frequently purchased goods and services ✔ Measure for public understanding of consumption tax hikes ✔ Consideration in terms of social welfare policy ✔ Consideration supporting specific industries ✔ Economy-boosting measure ✔ Measure to keep the base of democracy and right to know 8
Amount of annual expenditure on each item and proportion of annual expenditure to annual income - 1 (In ten thousand yen) Annual income quintile group Bottom quintile Top quintile 722 proportion of Average expenditureof Bottomquintile Top quintile ～ ～ 248 proportion of expenditureof Top quintile Bottom quintile 515.0 515.0 170.0 170.0 1065.0 1065.0 Annual income ( 100.0% ) ( 100.0% ) ( 100.0% ) ( 100.0% ) ( 100.0% ) ( 100.0% ) 297.2 165.4 458.4 2.26 2.77 Total consumption expenditure ( 57.7% ) ( 97.3% ) ( 43.0% ) 57.4 36.2 76.8 Food 2.95 2.95 2.12 2.12 (excluding Alcoholic beverages and Meals outside the home) ( 11.1% ) ( 21.3% ) ( 7.2% ) 6.6 4.2 8.5 3.12 3.12 2.01 2.01 Cereals ( 1.3% ) ( 2.5% ) ( 0.8% ) 6.4 4.1 8.3 3.10 3.10 2.02 2.02 Fish & shellfish ( 1.2% ) ( 2.4% ) ( 0.8% ) 5.9 2.9 8.9 2.06 3.04 Meat ( 1.1% ) ( 1.7% ) ( 0.8% ) 3.3 2.1 4.6 2.84 2.21 Dairy products & eggs ( 0.6% ) ( 1.2% ) ( 0.4% ) 8.1 5.5 10.6 3.22 3.22 1.95 1.95 Vegetables & seaweeds ( 1.6% ) ( 3.2% ) ( 1.0% ) 3.2 2.4 3.9 3.92 3.92 1.60 1.60 Fruits ( 0.6% ) ( 1.4% ) ( 0.4% ) 3.3 2.0 4.4 2.79 2.24 Oils, fats & seasonings ( 0.6% ) ( 1.2% ) ( 0.4% ) 6.6 3.9 9.3 2.60 2.41 Cakes & candies ( 1.3% ) ( 2.3% ) ( 0.9% ) 9.4 6.4 12.4 3.23 3.23 1.94 1.94 Cooked food ( 1.8% ) ( 3.7% ) ( 1.2% ) 4.5 2.8 6.0 2.96 2.96 2.12 2.12 Beverages ( 0.9% ) ( 1.7% ) ( 0.6% ) (source) Annual report on the family income and expenditure survey 2012 (Ministry of Internal Affairs and Communications) - http://www.stat.go.jp/english/data/kakei/index.htm The Family Income and Expenditure Survey (FIES) is a sample survey conducted each month. It aims to grasp the actual conditions of income and expenditures of households in order to provide a base for social and economic policy. The survey covers all types of households, excluding households with student only, hospitalized person only, etc. In the FIES, about 9,000 sample households are selected based on statistical methodologies so that they represent all 9 households in the whole country.
Amount of annual expenditure on each item and proportion of annual expenditure to annual income - 2 (In ten thousand yen) Annual income quintile group Bottom quintile Top quintile proportion of expenditureof Bottomquintile Top quintile Average 722 ～ ～ proportion of expenditureof Top quintile Bottom quintile 248 3.6 2.0 5.1 2.47 2.54 Alcoholic beverages ( 0.7% ) ( 1.2% ) ( 0.5% ) 15.9 7.5 25.9 1.83 3.43 Meals outside the home ( 3.1% ) ( 4.4% ) ( 2.4% ) 22.8 19.0 24.2 Housing (4.92) (1.27) （ e.g.Rents for dwelling & land ） ( 4.4% ) ( 11.2% ) ( 2.3% ) 23.3 16.4 30.0 3.42 3.42 1.83 1.83 Fuel, light & water charges ( 4.5% ) ( 9.6% ) ( 2.8% ) 10.6 6.3 16.0 2.45 2.56 Furniture & household utensils ( 2.1% ) ( 3.7% ) ( 1.5% ) 12.5 5.9 23.0 1.60 3.92 Clothing & footwear ( 2.4% ) ( 3.4% ) ( 2.2% ) 13.2 8.5 18.0 2.96 2.96 2.12 2.12 Medical care ( 2.6% ) ( 5.0% ) ( 1.7% ) 40.8 18.6 66.9 1.74 3.60 Transportation & communication ( 7.9% ) ( 10.9% ) ( 6.3% ) 9.8 0.7 26.4 Education 0.18 35.35 （ e.g.tuition ） ( 1.9% ) ( 0.4% ) ( 2.5% ) 32.1 17.0 51.5 Culture & recreation 2.06 3.04 (e.g.newspaper, book, travel expenses) ( 6.2% ) ( 10.0% ) ( 4.8% ) 55.3 27.3 94.6 Other consumption expenditures 1.81 3.46 ( 10.7% ) ( 16.1% ) ( 8.9% ) (e.g.Personal care services, Tobacco) 10
Political needs for a multiple rate system - 2 Why are many countries unable to abolish multiple rate systems which are widely understood as inefficient? Are there any affirmative reasons to introduce a multiple rate system? Can we discover or create any balanced solutions between academic/scientific considerations and political reality? 11
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