Higher Consumption Tax

Mr. Abe seems to be thinking of raising the rate of consumption tax after the coming election.

What do you think is the effect of higher consumption tax on the economy? In our conjecture it will reduce the consumption spending. If so, Mr. Abe should think about its negative effect on the consumer behavior when a hike of consumption tax is in effect.

However, in economic theory consumption tax won't reduce the consumption. A little more advanced economic model, say, the Ramsey model indicates that consumption tax will leave the consumption unchanged. You may say that it's a strange implication, but if consumers were rational and able to foresee the higher rate of the tax in the future, they would make an optimum consumption plan in consideration of it and wouldn't change their consumption spending.

In my sight higher consumption tax will probably reduce the consumption spending because many consumers are not so rational that they can expect a rise in the tax exactly, as Ramsey model says.

Abe hints government will consider raising consumption tax after election

...."The tax system must be fundamentally reformed this coming autumn. I've never said we'll not raise the consumption tax," Abe said in a Nippon Television (NTV) program Thursday night.

Abe also said the spending of taxpayers' money should be thoroughly reduced before raising the 5 percent indirect tax levied on virtually all goods and services. "If we determine the percentage of the tax hike during tax reform discussions, (the government's fiscal discipline) could be loosened." Chief Cabinet Secretary Yasuhisa Shiozaki denied that the government will bring up a consumption tax hike as a policy issue during the campaign for the July 29 election.

(Mainichi)
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July 6, 2007