Value Added Tax Revisited: Toward a Reasonable Consumption Tax Reform in Japan
This paper explores a reasonable consumption tax (VAT) reform in Japan, after passing the tax reform bill in the Diet in August 2012. First, the macro (SNA) data indicates that tax revenue increases by about 12 trillion yen if the VAT rate is raised from 5% to 10%. Secondly, the VAT revenue function reveals the revenue elasticity with respect to 1% consumption increase is 0.96. This is very efficient. Thirdly, remaining tax administration issues are discussed. Fourthly the empirical consumer demand system (QUAIDS) is derived from the optimal consumption behavior. Fifthly, using Family Income and Expenditure Survey from January 1985 to April 2012 for the two or more member worker's household, food and health & medical expenditure indicate significantly negative price elasticity of demand and those for other expenditures are insignificant, i.e. zero. It is justifiable to set a uniform tax rate for those items except food and health & medical expenditure. As to health & medical expenditure, many items within health & medical expenditure are already tax exempt and thus effective tax rate for health & medical expenditure is around 2%. There is no need to consider a further tax rate reduction for this. As to food expenditure, effective tax rate is around 7% due to alcohol and other sales tax. This item is worth considering a reduction of tax rate. However, a share of food expenditure is quite high (i.e. around 20%) so that tax revenue loss would be high if a reduced tax rate is applied for many food items. In addition, it will be quite arbitrary and politically biased to decide as to which food items are to be tax reduced. For a moment, it may be reasonable not to implement any tax reduction for food items.
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