SECOND MEETING OF THE OECD GLOBAL FORUM ON VAT The History and - PowerPoint PPT Presentation

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 ） 120 101.0 100.7 98.1 97.1 95.9 100 89.3 89.0 85.5 95.3 84.9 84.8 84.4 83.7 82.4 81.8 81.4 78.8 78.5 75.9 80 75.1 84.7 73.6 Total Expenditures 70.5 70.5 69.3 65.9 61.5 60.1 59.8 57.7 60 54.9 54.4 54.1 53.9 53.6 53.0 51.9 52.1 51.5 51.0 51.0 50.6 50.8 50.7 52.0 49.4 49.1 49.1 47.9 50.0 46.9 47.2 47.2 46.8 45.6 45.4 43.8 15.0 43.4 43.3 47.5 Tax revenues 44.3 41.9 43.9 42.3 42.8 38.2 42.9 41.3 38.8 38.7 37.5 42.8 40 34.9 Special Deficit-Financing 41.5 35.0 35.3 35.5 34.1 8.4 11.4 7.0 6.0 32.4 34.0 33.0 33.2 30.5 7.6 Bond Issues 31.3 29.0 30.0 29.1 26.9 6.7 27.5 8.7 13.2 9.1 24.5 23.7 25.4 7.0 21.9 11.1 Construction Bond Issues 7.8 20.9 17.0 9.1 6.4 18.4 19.9 18.5 17.3 6.0 20 15.7 16.2 13.8 36.9 34.7 34.4 36.0 35.8 35.2 13.2 13.5 14.2 12.9 14.0 13.5 12.8 12.3 11.3 9.4 10.7 9.9 25.8 28.7 26.8 23.5 21.1 19.3 9.5 26.2 10.7 24.3 21.9 20.9 9.6 7.2 7.0 6.6 6.7 7.0 6.3 7.1 6.8 16.4 6.4 7.0 6.3 7.2 16.9 6.2 16.2 12.3 6.3 5.3 5.0 6.9 3.7 9.5 9.2 8.5 6.2 3.2 7.2 7.0 6.4 6.3 6.7 6.4 6.3 6.7 5.9 6.0 4.5 5.0 4.3 3.5 0 2.1 2.5 2.0 1.0 0.8 0.2 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 3 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.

Government Financial Liabilities and Household Financial Assets Trends in General Government Financial Liabilities General Government Gross Debt and Household Financial Assets (International Comparison) （％） (unit : trillion yen) 240 1,800 Japan 1,579 Household Gross 1,600 210 Financial Assets 1,400 180 1,218 1,200 Household Net 150 Financial Assets Italy 1,000 1,124 France 120 800 U.K. U.S. 616 General Government Canada 90 600 Gross Financial Germany Liabilities 60 400 General Government 200 30 Net Financial Liabilities 0 0 1999 2001 2003 2005 2007 2009 2011 2013 （ CY ） (Source) OECD “Economic Outlook 94” (November, 2013 ） (Note1) The data are as of the end of FY. (Note)Figures represent the general government-based data 4 (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. )

Aging Population ● Ratio of People Older than 65 years to the Total Population ● Japanese Life Expectancy 1961 1973 2012 Life Expectancy 66.0 70.7 79.9 (male) Life Expectancy 70.8 76.0 86.4 (female) Life Expectancy at age 65 11.9 13.2 18.7 (male) Life Expectancy at age 65 14.1 16.1 23.8 (female) Life Expectancy at age 75 6.7 7.4 11.6 (male) Life Expectancy at age 75 7.8 9.1 15.3 (female) (Source) Japan 1950- 2010: “National Census” (Ministry of Internal Affairs and Communications) (Source) “Abridged Life Tables 2012” (Ministry of Health, Labor and 5 2011-2050 : “Japanese Future Demographic Projections” (National Institute of Population and Welfare) (July, 2013) Social Security Research) (January, 2012) Other countries: “World Population Prospects: the 2012 Revision” (United Nations)

Balance between beneficiaries/contributors in social security system is getting vulnerable <1965> <2012> <2050> Taking measures for the elder to 65 or older work longer ＾＾ ＾＾ ＾＾ ＾＾ ＾＾ ＾＾ ＾＾ ＾＾ > < - - ; - - ; - - ; ＾＾ ＾＾ ＾＾ need to increase the “supporters” 1 : 1.2 1 : 3 1 : 9.1 by social security reform 20-64 ^ ^ ^ ^ 0 0 Population (component ratio) 3,083 618 Support of childcare (24.2%) (6.3%) etc. 3,768 65 or older (38.8%) 5,608 7,415 (57.1%) (58.2%) 20-64 4,643 (47.8%) 3,602 2,252 (36.7%) 19 or younger (17.7%) 1,297(13.4%) 1965 2012 2050 （ 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) 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 Individual Corporate Income Commodity tax etc. General Account Income Tax Tax 5.5 (39.9 ％ ) 4.1 (30.0 ％ ) 0.8 (5.5 ％ ) FY 1975 13.7  Need to shift the balance from direct taxes to indirect taxes  1978 Consideration of General Consumption Tax by LDP  Election rout → recalled  １ 987 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 Individual Corporate Consumption tax General Account Income Tax Income 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  Economic Depression  1994 Consideration of National Welfare Tax by SP Nominal Real coalition forces ⇒ Recalled GDP growth rate  1994 Submission of the bill of the consumption tax rate ( ％ ) (in trillion yen) hike by LDP coalition forces ⇒ Approved by the Congress  1997 Consumption tax rate hike FY 1996 515.9 2.7  Contents of the tax reform FY 1997 521.3 0.1  Consumption tax rate hike （３％ → ５％） △ 1.5 FY 1998 510.9 Reduction of special measures for SMEs ： lowering  exemption threshold, narrowing simplified tax system FY 1999 506.6 0.5  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 ） 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 ％ ) 12 Note: Commodity tax was abolished when the consumption tax was introduced.

Trends in Real GDP and Private Consumption before and after the Increase of the Consumption Tax Rate in 1997 13