Is “Low Productivity in Japan” an Excuse to Raise Taxes? Sustainability Scholar Takes a Swipe at Three Allegations in “New Capitalism

Bold” and “extraordinary” but with no “specifics” in sight

Prime Minister Fumio Kishida has announced that 2023 will be the year he will launch “new capitalism” in earnest.

Under the banner of “new capitalism,” Prime Minister Kishida claims to be reforming neoliberal economic policies and realizing a “virtuous cycle of growth and distribution,” but we do not know exactly what this means.

Last December, he suddenly announced a “tax hike to increase defense spending. However, in the end, the government decided to increase the total amount of defense spending to 43 trillion yen over the five-year period from FY2023 to FY2027 (1.5 times the amount of the previous five years), and in the name of covering the shortfall in financial resources, the ruling party has proposed “tax increases” on income tax, tobacco tax, and corporate tax beginning in FY2027. The ruling party’s policy is to “increase” income tax, cigarette tax, and corporate tax in order to make up for the shortfall.

Furthermore, on January 4, the government announced a “child allowance” and a “doubling of the budget for children,” without mentioning any financial resources.

The lack of specifics in the “bold” and “extraordinary” policies has been criticized by many as “just another tax hike” or “just a rehash of Abenomics.

The first suspicion: Is he trying to bust “small and medium-sized enterprises”?

So, what really is the “new capitalism” that Prime Minister Kishida is aiming for?

Sustainability scholar Kento Sasano, a member of the World Economic Forum (WEF) and the UN Principles for Responsible Investment (PRI), who leads a group of geniuses researching and developing new SDG/ESG data science technologies, points out that there are “three suspicions” regarding the “new capitalism” being promoted by the Kishida administration The first is that “small and medium-sized enterprises are being crushed by the government.

The first is that “they are trying to destroy small and medium-sized enterprises. What is the basis for this suspicion?

Most of the companies that have been hit really hard by Corona, such as restaurants and lodging, are small and medium-sized businesses.

The increase in the number of loss-making SMEs in Corona gives the impression that the government’s tax revenue will decrease, but according to the National Tax Agency’s “Results of the Sample Survey of Corporations” for fiscal 2019, 38% of the 2.47 million corporations pay taxes, and 62% of them do not.

The Ministry of Finance must have seen that the impact on tax revenues was limited because there are a reasonable number of companies that do not pay taxes, and many of the small and medium-sized companies hit by Corona were loss-making to begin with.

In other words, even though the deficit swelled due to Corona, there was not much impact in terms of tax revenue, given the reality that many small and medium-sized enterprises have been in the red and not paying taxes for some time. On the contrary, he says, the fact that tax revenues reached a record high also shows how amazing the performance of the K-shaped recovery group of large companies has been.

If that is the case, it is not surprising that the government, if it only considers tax revenue, would not mind if small and medium-sized enterprises went out of business.

Some may argue that small businesses that actually receive subsidies are useless and should be allowed to go out of business. Anyone with a little imagination should be able to understand how much goods and services that support our daily lives are supported by SMEs. ……

Another point he makes is the “consumption tax hike” speculation.

The consumption tax for FY2020 is 20.971 trillion yen, an increase of 2.6 trillion yen over the previous year, reaching the 20 trillion yen mark for the first time.

The income tax, corporate tax, and consumption tax are called the “three core taxes,” and the consumption tax topped the list for the first time. The explanation for this is simple: the increase in the consumption tax rate from 8% to 10% in October 2019 is having a real effect.

For example, something that costs 100 yen goes from 108 yen to 110 yen, and you might think, ‘That’s only 2 yen,’ but 8 yen to 10 yen is a 25% increase, and when you look at the overall scale of tax revenues, it has a huge effect.”

Certainly, the tax hike would have generated a certain amount of tax revenue, since everyone consumes at least the minimum necessary amount regardless of the economy. However, many people complain of a sense of inequality, saying that too much will be taken from the economically weak.

Furthermore, we must not forget that, despite the fact that social security and other reasons were given when the consumption tax was raised, in reality, the burden has only increased and the money has not been used for social security. On the contrary, last December, the government even announced a policy of diverting part of the reconstruction tax to finance defense spending. This is an act of betrayal of the many people who had accepted the idea that “if it is for reconstruction, it is inevitable.

The second allegation: Can “regional development” be achieved through a “redistribution policy” of “haphazard spending?

Second, Mr. Sasano raises the “putting off the regions” allegation as the second thing that Prime Minister Kishida is trying to promote.

In the name of Prime Minister Kishida’s ‘new capitalism,’ income inequality has become a hot topic, especially from the perspective of regional development.

When it comes to the issue of regional income disparity, people tend to focus only on “redistribution policies” that merely disperse money, but more steady structural reforms are needed. In fact, overseas, the establishment of corporations and enterprises to boost local communities has already become a trend.

In fact, since the postwar period, Japan’s interregional income disparity in terms of per capita real prefectural income has been shrinking on a long-term axis. This is due to the fact that regions have specialized in specific industries in which they are competitive and have increased their competitiveness. On the other hand, regions specializing in agriculture, forestry, and fisheries (such as Hokkaido and Miyazaki) have not been able to narrow the income gap with Tokyo, which is a challenge due to differences in industry sectors.

In order to narrow the income gap between regions in the future, it is important to generate high value-added goods and services within the region through sales of goods and services to other regions in Japan (transfers) and sales of goods and services outside Japan (exports).

In particular, in regions with high net exports to foreign countries, the income gap with Tokyo is smaller. However, at present, net transfers and exports are positive only in some regions such as Kanto and Tokai, while net transfers and exports are negative in Hokkaido, Tohoku, San-in, Shikoku, and Kyushu/Okinawa.

Therefore, while increasing exports and transfers in areas of regional strength, steady structural reforms are also necessary, such as expanding the base of related industries within the region to reduce the outflow of income to other regions for the purchase of raw materials, etc.”

Third Suspicion: Is “Japanese Productivity” Really Low?

The third question is, “Is Japan’s productivity really low?

Since Japan’s GDP ranks third after the U.S. and China, it does not seem inherently wise to dismiss productivity as low.

On the other hand, I believe there are only three ways to achieve economic growth: ‘increase the number of people, increase capital, and increase productivity.’ Japan’s population is shrinking, and even though it has a lot of capital, its productivity is very low.

In other words, we can only come to the conclusion that there is no other way but to “raise productivity.” So what should we do to raise productivity? By improving governance, improving capital allocation, and reinvesting the huge amount of capital held by companies, productivity can be increased, but these solutions are never mentioned, are they?

Japan has a lot of capital, including technology, but because it lacks the ability to appeal to the public, it has not been able to sell it overseas.

They just keep putting that on the back burner and keep throwing around subsidies and other such buzzwords like “let’s nurture our people” and “let’s invest in start-ups to increase productivity. Even with regard to subsidies for start-ups, they have suddenly narrowed their focus to drug discovery and related fields. New capitalism” is a “new capitalism” that is “new capitalism.

Is “new capitalism” a pretext for raising taxes?

The rationale for this can be seen by reading Prime Minister Kishida’s “Grand Design for New Capitalism and Action Plan.

In the Grand Design, ‘productivity’ is mentioned only three times, while the word ‘support’ appears 54 times. ‘Governance’ and ‘shareholders’ do not appear once. Also, ‘wages’ is mentioned 19-20 times.

What exactly is the mechanism for increasing profits and wages, if not governance and more flexible labor laws?

Apparently, the government thinks that if it demands that companies raise prices and increase wages, wages will rise, but companies cannot just raise prices when they have to compete.

After all, raising prices is a formula for losing more and more revenue to competition, lower profits, lower bonuses, and bankruptcy.

They state, ‘In next spring’s wage negotiations, we will aim to raise wages to cover price increases, strengthen price pass-on and productivity improvement measures, expand subsidy programs (subsidies and support), and ensure compliance with the equal pay for equal work system to improve wages for non-regular workers.

But he is just talking about encouraging companies to raise prices or raise wages, and if they do both, companies will receive some kind of short-term tax benefit, etc.

That is not a long-term strategy that will grow this economy in 15 years and bring vibrancy, excitement, and benefits for our youth. In fact, it will accomplish very little and will put us into greater debt. That debt will have to be paid by young people in the form of higher taxes.

I don’t believe that the LDP is really trying to increase productivity. In the end, it looks to me like they are trying to exploit the new capitalism as an excuse to raise taxes.”

So what can be done to increase productivity in the future? The answer, says Sasano, is to “sell to American investors.

Half of the assets held by investors around the world are in the US. In this environment, American investors’ thinking is now based on ESG (Environmental, Social, and Governance), and they look to see if a company is properly managing its business based on evidence, but in Japan, there is no unified platform that compiles such corporate information. In Japan, however, there is no unified platform for compiling such corporate information, so even if a company has excellent technology and sustainable management, it cannot appeal to investors in the United States.

That is why we are now working to create such a platform.

It is not that “productivity in Japan is low” or “Japan is finished,” but that they simply do not have a way to appeal their superior technology. When I hear that, I think I can see a certain light with a different logic from the “raise prices -> raise wages” mulligans.

Kento Sasano is a sustainability scholar. Wandered the borderline between life and death in high school, and was awakened to philosophy. He is a gold medalist in the Philosophy Olympiad, a graduate of Kyoto University’s Faculty of Law, and the University of Tokyo’s Interfaculty Initiative in Information Studies and Graduate School of Interdisciplinary Information Studies, and has held a total of five corporate executive positions, etc. In April 2021, he was appointed Representative Director of Scrumy Inc. In April 2022, he was appointed Representative Director of Sustainability Association, Inc. Aiming at SX (Sustainability Transformation) of capitalism, he conducts advanced research and projects related to sustainability studies from the perspective of social informatics (ESG data science, etc.).