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Points of Discussion over the Planned Consumption Tax Increase: Tax hike would not necessarily lead to slower economic growth
OGURO KazumasaConsulting Fellow, RIETI
Prime Minister Shinzo Abe is expected to decide by early October 2013 on whether or not to go ahead with the planned consumption tax rate hike from the current 5% to 8% in April 2014, by evaluating the country's economic outlook. The government has begun studying possible effects on the Japanese economy of the planned tax hike as well as of some other possible options such as reducing the margin of the April hike from the planned three percentage points and postponing the tax increase. The move is believed to come in response to concern that the planned tax increase will negatively affect the domestic economy. In fact, the consumption tax hike from 3% to 5% in 1997, which translates into an increase of five trillion yen in financial burden on consumers, was blamed for further aggravating the already slumping Japanese economy.
Typically, the economic impact of a tax increase can be evaluated in two dimensions, namely, in terms of its effects on a country's economic growth and tax revenue. Higher taxes will lower household disposable income, which in turn will dampen consumption thereby resulting in slower economic growth. This mechanism for tax changes to affect economic growth is called the "income effect."
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