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  5. Will a Combined Reform of Taxes and Social Security Be Realized?

2013 Vol.1
Will a Combined Reform of Taxes and Social Security Be Realized?

2013/01/01

The Democratic Party realized in 2012 the enactment of a bill for increases in the rate of the consumption tax even though it had become the ruling party with a promise to maintain the current rate of five percent. The tax rate hike was decided rather abruptly, which can be attributed to a seeming lack of revenue sources for achieving policies listed on the party’s manifesto such as a child allowance program. For example, while the child allowance program backed by the party was a novel reform of the social security system, it effectively lasted for only around two years due to insufficient funds and during the parliamentary situation when the ruling party held the lower-house majority and the opposition parties held the upper-house majority. A combined reform of taxes and social security was meant to improve and stabilize the social security system and reform the tax system to secure stable revenue sources for a sound fiscal condition. However, the tax reform, which was represented by the hike in the consumption tax rate, was tackled first, and the bill for the social security reform was postponed, and thus reform or improvement of the social security system was not realized. As a result of the lower-house election held in December 2012, the Democratic administration was replaced by a Liberal Democratic one. Even if prices increase due to an inflation target policy and the consumption tax rate hike, the following is expected to occur unless wage deflation stops: restrained consumption, a resumption of deflation, falling revenue from the consumption tax, and insufficient tax revenue for social security programs. In other words, it is expected that the tax reform including the consumption tax rate hike will be implemented, while reform or improvement of the social security system will be postponed.

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