Takashi Kuribayashi, Director of Chiba University of Commerce Research Center for Economics

Former President of our university, Kato Hiroshi, once said that the "politics" of finance is the "politics" of politics, and this is a perfect description when it comes to the debate over tax increases. Prime Minister Koizumi, who was in power when the Liberal Democratic Party was in power, did not hesitate to state publicly that "the consumption tax rate will not be raised while I am prime minister." For a politician, the debate over tax increases is a big no-no, because voters dislike tax increases and they will lose votes. The Hatoyama administration, which was launched with the expectations of the people on its shoulders, was no exception, and Prime Minister Hatoyama has made statements almost identical to those of former Prime Minister Koizumi.

There is an economic theory called the "rational expectations hypothesis" by R. Lucas, who was awarded the Nobel Prize in 1995. According to this hypothesis, people have a perfect understanding of the economy and rationally use all information to make predictions about the future. If we apply this theory to the Japanese people today, we can predict that "Japan today has accumulated huge amounts of national debt and is in a serious fiscal deficit. In the short term, we need to take the economy into consideration, but in the medium to long term, fiscal reconstruction is necessary, and in order to achieve this, tax increases are inevitable." What I am trying to say is that a certain degree of public consensus on tax increases is beginning to be achieved.

The initial budget for fiscal 2010, which the Democratic Party government put together after a difficult birth, ended up being the largest ever at 92.2 trillion yen, as budget cuts made through the review of government projects did not progress at all. Tax revenue, the original source of revenue, remained at 37.3 trillion yen, a significant decrease of 8.7 trillion yen from last year. This was mainly due to the large drop in corporate tax revenue caused by the global recession triggered by the Lehman Shock. Japan's tax structure has a high direct/indirect tax ratio, and direct taxes depend on nominal price elasticity and are greatly affected by the economy. The Democratic Party government needed additional budgets to implement its manifesto, such as child allowances, so this decrease in tax revenue was an unexpected miscalculation. Government bond issuance reached a record high of 44.3 trillion yen, but the government used the sophistry that this amount was almost the same as the amount of government bond issuance in the budget, including the supplementary budget, of the previous Aso administration. In other words, the new administration is claiming that it has not increased debt. However, even this did not balance the budget, and although the government managed to secure 10.6 trillion yen by digging up surpluses (so-called buried treasure) in special accounts, this will only last for this fiscal year. In other words, a tax increase is essential to drawing up next year's budget.

Now, let's move on to the debate over tax increases. In the short term, they are necessary as a source of funds for fiscal spending aimed at overcoming deflation, and in the medium to long term, they are necessary for fiscal reconstruction. In Japan, three core taxes - income tax, corporate tax, and consumption tax - cover about 80% of national taxes. There is pressure to lower corporate tax from the perspective of international competitiveness of companies. As for income tax, a tax increase is expected due to the abolition of personal deductions, etc., but since this is paired with cash benefits through child allowances, it can be seen as essentially almost neutral. The only remaining possibility is a significant increase in the consumption tax, but the consumption tax, which relies on a consumption-type value-added tax as its theoretical base, has a fatal flaw called "regressivity." At the current 5 percent tax rate, the flaws are not very obvious because the tax rate is low, but when the tax rate is increased, measures such as "tax credits with benefits" and "lighter taxes on food" will need to be taken.

In any case, I believe that the groundwork is being laid for the public to accept a tax increase. In the end, we can only hope for the government's "politics," and the government needs to clearly show the public "what kind of society it wants to create."