NEW YORK (Dow Jones)–Japan, struggling with the aftereffects of a devastating earthquake and tsunami on top of decades of stagnation, should raise its consumption tax starting next year to 15% from the current 5% level, the International Monetary Fund said Thursday in a staff discussion note.
“With limited room to reduce non-social security expenditure and spending pressures from an aging society, new revenue measures must play a central role in a medium-term strategy to bring down Japan’s high level of public debt,” the paper’s authors wrote. “Among various revenue measures, raising the consumption tax is the most appealing.”
As it tries to rebuild after March’s earthquake, tsunami, and nuclear crisis, Japan is still working its way out of the “lost decade” that followed a long economic boom. Since the early 1990s, the country has seen its sovereign debt triple to 200% of gross domestic product, while its social spending has spiked as its population ages and its birth rate tumbles, the report noted.
Compared with the personal or corporate income taxes, “raising the consumption tax is the most growth-friendly,” said Kenneth Kang of the IMF’s Asia and Pacific Department, one of the authors of the report, during a conference call to discuss the findings.
After the earthquake, polls show more Japanese voters getting behind a higher consumption tax, previously an unpopular plan. The report’s authors declined to discuss potential political ramifications of raising the tax.
The IMF fingered the consumption tax because Japan’s is among the lowest in industrialized countries; European countries have an average rate of 20%. Tripling the tax could get Japan about halfway toward a declining public debt ratio, the paper said.
The authors recommended that Japan start increasing the tax in 2012, raising it gradually, keeping it high, and leaving in place the basic structure of a flat rate for all purchases.
If Japan doesn’t take these steps, the country could be in for deeper fiscal troubles. “Without fuller exploitation of the potential of the consumption tax, it is hard to see how fiscal sustainability can be restored,” the report warned.