Media Mix, July 8, 2012


Here’s this week’s Media Mix, which is about the consumption tax and how it’s structured. As I pointed out in an earlier column, most of the major media bought the consumption tax increase a long time ago. In this piece I try to explain how the tax is collected, because most people who pay it don’t really understand how it works, and they need to understand how it works in order to decide for themselves just how “fair” it is. Whenever the media reports on how more small and medium-sized businesses may go out of business after the consumption tax increase goes into effect, average consumers may misunderstand the reasons as being solely due to loss of demand. For sure, stifled demand will have a bad effect, especially this time. The last time the consumption tax was raised, in 1997, the government also passed an income tax cut, which offset some of the negative effects for the consumer, but bankruptcies still increased. As secondary media like Tokyo Shimbun and Aera have reported, bankruptcies will likely increase significantly with a consumption tax increase this time because of the tax itself and not just because of downward pressure on consumption. If people don’t understand that, they’ll just buy the mainstream media line that the consumption tax is too low by world standards and the government line that it’s the best means of bringing down the deficit. But if you use those points of reasoning, then why doesn’t the government increase taxes on assets, such as capital gains, inheritances, and property? In those areas, Japan also has lower rates than the rest of the world, but the Liberal Democratic Party won’t have it, presumably because it’s not “fair” to people with higher incomes.

The consumption tax has another adverse effect on the economy in general. As I mentioned in the column, businesses calculate the consumption tax they owe by subtracting their supplies from their sales and then multiplying the difference by 0.05. Personnel costs, however, are not counted as supplies. What I didn’t mention in the column is that businesses can get around this rule by using contract workers and temporary services. The fees that companies pay to independent contractors can be included in the expenses they subtract from their sales, thus reducing their consumption tax burden. Also, businesses pay consumption tax to temp companies when they use their services, so they also can add that consumption tax to their expenses. However one feels about the practice of “regular employment,” the fact is that after the consumption tax was raised in 1997, the number of “self-employed” workers went up dramatically, especially in the construction field. The irony here, though somewhat latent, is that the original purpose of the consumption tax was to help support social security programs, and most of these workers who were suddenly rendered as “private operators” had to provide their own benefits, meaning they lost the benefits they’d previously enjoyed as company employees. So, in a way, the consumption tax increase was theoretically helping to make up for that loss of benefits. Now, however, it isn’t even doing that because 80 percent of the revenue from the newest consumption tax increase will go to paying off the debt. And one more thing: in the unlikely event that those private operators make more than ¥10 million a year, they have to pay consumption tax on their wages, which means they are compelled to charge consumption tax to the company or companies they work for. There are rumors that the government would like to lower the ceiling to ¥5 million, which means that I would also have to pay a 10 percent consumption tax on top of the other taxes I pay since I am a self-employed freelance writer. Over the past ten years the fees that publishers and others pay me has been dropping steadily for various reasons. Asking those companies to pay me an extra 10 percent in consumption tax will not only be ridiculously complicated and time-consuming, but probably fruitless. It’s likely they will simply ask me to reduce my fees accordingly. After all, they aren’t required by law to pay me. I’m only required by law to pay the government.

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3 Responses to Media Mix, July 8, 2012

  1. rontokyo says:

    I’m afraid I’m still unclear as to why the number of bankruptcies among small businesses will likely increase due to “the tax itself.” Is it because they will be forced to swallow the tax increase instead of passing it on up the chain, thereby making it more difficult to turn a profit? But that’s no different than the situation. Further clarification much appreciated.

    Admittedly, like most residents, I’m fairly ignorant about how the consumption tax works so your Media Mix columns and this blog entry make for interesting reads. The real eye-opener was the huge subsidies major exporters receive in the form of consumption tax refunds. Also noteworthy is discovering that companies can deduct salaries for contract and temporary workers — one more reason to hire as few full-time ”regular” employees as possible. And one more reason why salaries have remained flat [or fallen] for so long.

    • rontokyo says:

      Correction: “But that’s no different than the situation” should read “current situation.”

      • philipbrasor says:

        The reason it is being predicted that more bankruptcies will occur is that the tax will double by 2015, meaning, theoretically at least, these smaller companies will have to come up with twice as much money as they do now to pay the government, and if they are forced to absorb the increase by the people they sell to, it could destroy whatever profits they are making now. As pointed out in the article, bankruptcies went up the last time the consumption tax was increased.

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