Idealism is not enough in time! Highest corporate profits at the expense of households–This is the only reason why a consumption tax cut is the right thing to do!

The autumn extraordinary session of the Diet is about to begin. The biggest theme must be “measures against high prices. While specific policies will be debated not only in the Diet but also in the media and social networking sites, experts point out that “Considering the original function of taxes, which is to redistribute income in society, the justification for a consumption tax cut is clear.

Big Gaps in “Measures to Cope with High Prices” between Ruling and Opposition Parties

Sanae Takaichi, the 29th president of the Liberal Democratic Party, suddenly finds herself in a difficult situation. The LDP, which now has a minority in both the House of Representatives and the House of Councillors, will need to build a cooperative framework with opposition parties in order to pass a supplementary budget for fiscal 2013 in the current Diet session. Depending on how the talks go, a new coalition government may be formed.

The main focus of the talks with the opposition parties will likely be on measures to deal with high prices, which was also an issue in the recent Upper House election. The opposition parties in the Upper House elections all advocated cutting consumption taxes. In contrast, Takaichi, the candidate for the presidential election, advocates a “tax credit with benefits. Since there is still a gap between the consumption tax cut and the tax credit, it is unclear where a policy compromise can be found, and it is difficult to predict. Strong resistance is expected from the Ministry of Finance with regard to the consumption tax cut, and a difficult process is inevitable.

The purpose of this paper is to contribute to the debate by explaining the justification for a consumption tax cut on the basis that one of the roles of “taxation,” the “income redistribution function,” has not been functioning at all for a long period of time. Let us explain in the following order.

The “inequity” between households and businesses is growing

First of all, the basic income redistribution function refers to the role of bridging the income gap among people by allowing high-income earners with economic power to pay a relatively large amount of taxes, which are then used to pay social security contributions to low-income earners. For example, income and inheritance taxes are based on a “progressive taxation system” in which the higher the amount of income or inheritance, the higher the tax rate, and the higher the income, the higher the amount of taxes paid.

However, income redistribution, which is the subject of this report, is not about individuals with income disparities. We are talking about the disparity in redistribution between households, which are the economic agents of the nation, and corporations. To sum up first, funds are unevenly distributed to corporations at the expense of households.

Corporations record their highest profits for the fourth consecutive year…while real wages are negative year-on-year for the third consecutive year.

First, let us discuss the situation in the corporate sector, which is doing extremely well. Corporate earnings continue to record the highest profits, as evidenced by the fact that the Nikkei Stock Average has recently reached a new high. The overall earnings of TSE prime-listed companies reached a record high for the fourth consecutive year in the fiscal year ended March 31, ’25.

This is not limited to large companies; according to the Ministry of Finance’s “Survey of Corporate Statistics” released in September, total ordinary income on an all-industry basis (including the finance and insurance industries) also reached a record high for the fourth consecutive year. As a result, corporate retained earnings (accumulated capital) at the end of March ’25 totaled 718 trillion yen, a record high for the 13th consecutive year.

On the other hand, what about personal income? According to the “Monthly Labor Survey” by the Ministry of Health, Labor and Welfare, real wages were negative year-on-year for eight consecutive months from January to August 2013. And there is a strong possibility that the negative trend will continue for the remainder of the year. Furthermore, on an annual basis, wages have been negative for three consecutive years until 2012, and if this trend continues, wages are likely to remain negative for four consecutive years. In other words, real wages, taking price fluctuations into account, have been declining for the past three to four years.

Since last year, there have been many reports of “historic wage increases in the Spring Struggle,” but overall real wages have not risen at all.

Real household consumption and the reality that “income is less than it was 11 years ago”

Many of you are probably familiar with the information so far. However, if we go back a little further, the dismal state of household finances emerges.

GDP statistics include an item called “household final consumption expenditure (real). The record high was 299 trillion yen in FY13, and it has not increased at all in the 11 years since then. In FY2012, it was 291 trillion yen, so the level is still about 3% lower than it was 11 years ago.

A look at real wages over the same period reveals a dismal picture. A comparison of FY13 and FY24 shows a whopping -6%. Instead of increasing over the past 11 years, wages have decreased. This is definitely an extraordinary situation.

For the past 11 years, household consumption and income have been in a contractionary equilibrium. In other words, households have been forced to live on a life of endurance. In terms of personal consumption in particular, we are in the midst of the “lost 40 years.

Retained earnings, which are corporate savings, have increased by more than 90%.

Let us also check the nominal value of household final consumption expenditure, which does not take inflation into account. The nominal value of household final consumption expenditure was 292 trillion yen in FY13 and 325 trillion yen in FY24, so it increased by 11% during this period. Also, total cash wages (nominal wages) in the Monthly Labor Survey also increased by 11% from ’13 to ’24.

Although both have increased, the growth rate is extremely low considering the time period. This is in contrast to the growth of corporate profits. Corporate profits (ordinary income/all industries) increased 79% from 73 trillion yen in FY13 to 131 trillion yen in FY24. Retained earnings also expanded 92%, from ¥373 trillion to ¥718 trillion.

Furthermore, tax revenues from the national general account increased 60% from 47 trillion yen to 75 trillion yen. In other words, while household income and consumption have not increased at all over the past 11 years, taking into account price hikes, money has flowed back to the corporate and government sectors.

Consumption tax was increased while corporate tax was cut in stages.

The main causes of this situation are the tax system and inflation. First, in terms of the tax system, the consumption tax was raised from 5% to 8% in April 2002 and then to 10% in October 2007. The corporate tax rate, however, was reduced from 30% to 25.5% in 2000, then from 25.5% in 2000 to 23.9% in 2003 to 23.4% in 2004 to 23.2% in 2006. The rate has been reduced in stages from 25.5% in 2000 to 23.9% in 2003 to 23.4% in 2004 to 23.2% in 2006.

As a result, the breakdown of general account tax revenues changes.’ In 2001, consumption tax revenue was 10.8 trillion yen and corporate tax revenue was 10.5 trillion yen, almost the same amount. In 2012, consumption tax revenue increased 2.3 times to 25 trillion yen, while corporate tax revenue increased only 1.8 times to 18 trillion yen. The difference between consumption and corporate tax revenues widened from 300 billion yen to 7 trillion yen. This amount is roughly equivalent to a 3% consumption tax.

To begin with, the purpose of introducing the consumption tax in 1989 was to “correct the direct tax-to-income ratio” of tax revenues. The direct tax ratio is the ratio of “direct taxes” to “indirect taxes,” and the policy goal was to reduce the ratio of direct taxes such as corporate income tax and income tax, which were high at the time, and to increase the ratio of indirect taxes, mainly the consumption tax.

Since then, as mentioned above, the direct corporate tax has been continuously lowered, while the indirect consumption tax has been raised. During this period, there is no evidence of any discussion on the appropriate balance of direct tax ratios. This has resulted in a situation in which the income redistribution function is not functioning at all.

Inflation-induced “hidden tax hike” puts pressure on household finances

Recent inflation is also a major reason for the lack of increase in household consumption expenditures. The problem here is not a simple reason such as “prices are rising. The issue here is not simply that prices are rising, but that income taxes tend to increase at a faster pace than price and wage growth under inflationary conditions.

This phenomenon is known as “bracket creep” and is caused by the fact that income tax brackets change as income rises, resulting in higher income tax rates. This is also known as “hidden tax hikes” because income tax growth is larger than wage increases.

The national burden ratio, which was 40.1% in FY13, is expected to be 46.2% in FY25, an increase of about 6% during this period. The national burden ratio is the ratio of the public burden, which is the sum of taxes and social security contributions, to national income, and reached a record high of 48.4% in FY 2010.

Since FY 2011, the ratio has declined slightly due to the implementation of fixed tax cuts and benefits, but without such temporary measures, it would be estimated to be close to 50%. With such hidden tax hikes and the growing burden of social security spending, domestic demand, consumption spending, is unlikely to increase.

If bracket creep is left unchecked, prices will simply rise, and the benefits of rising incomes will not be passed on to households. In order to improve this situation, it will be essential to raise the minimum amount of taxation and review the categories in which tax rates are applied.

Unstoppable Increase in “Social Security Expenses”…National Burden Rate May Surpass 50%?

While households are growing weary, social security costs are rising relentlessly. First, the national pension premium will increase by 410 yen per month from April 2014. At the same time, the “Child and Child Rearing Support Program” will begin. This is a part of the government’s measures to combat the declining birthrate, and is levied on top of medical insurance premiums for national health insurance, health insurance, and other health insurance.

For company employees, the Child and Family Agency estimates that the amount collected under the Child and Child Rearing Support Program will be about 0.4% of annual income (from FY’28). The amount collected is proportional to annual income, and in reality, this amount is split 50-50 between labor and management. The tax is called a “bachelor tax” because it offers no benefits to single people.

In addition, this year the “baby boomers” will finally reach the late elderly, and long-term care insurance premiums, which are reviewed every three years, are expected to be raised even higher starting in FY27. This series of increases in social security costs is estimated to be equivalent to a 1% consumption tax increase for households. Probably, if no tax reduction measures are taken, the national contribution rate will exceed 50% sooner or later.

The “tax credit with benefits” is a viable option if it is made permanent, but it is a complicated and time-consuming process.

As the above “circumstantial evidence” shows, there is no doubt that reducing the consumption tax is an urgent issue (although care must be taken not to increase the number of items with reduced tax rates). (However, care must be taken not to increase the number of items for which the reduced tax rate is applied.)

Another option is the “tax credit with benefits” advocated by LDP President Takaichi. This is a tax reduction measure in which a certain amount is deducted from taxes, and if the deduction exceeds the taxable amount, the taxpayer receives a cash benefit for that amount.

For example, if the deduction is set at 100,000 yen, a person who pays 500,000 yen in income taxes would only have to pay 400,000 yen, while a person who pays only 50,000 yen would receive 50,000 yen. If institutionalized, this could be an alternative to consumption tax cuts, since the benefits are likely to spread to the middle class and low-income groups.

However, precedents in Europe and the U.S. indicate that it will take a considerable period of time before the system is introduced. It is essential to establish a system to accurately grasp data on personal income and assets, which in Japan’s case is expected to take at least four to five years. After all, the consumption tax cut is likely to be the main topic of discussion in the extraordinary Diet session.

The biggest problem is the “impoverishment of the middle class

As mentioned in the first half of this report, annual real wages are likely to be negative year-on-year for the fourth consecutive year. In addition, without going into detail, the gap between the average and median (the value with the highest number of relevant data) of individual annual incomes has been widening in recent years. In other words, poverty among the middle class is becoming more serious.

This impoverishment of the middle class had also been underway during the deflationary period, but had been masked by deflation. With the arrival of inflation, it has come to the surface in a flash and has accelerated. This is the biggest problem in Japan today.

The declining birthrate will not improve unless the poverty of the middle class is reversed. The number of children born to mothers in households with children has changed little compared to 30 to 40 years ago. What has changed is that fewer people are getting married and the percentage of households that marry but do not have children has increased.

The cause is clear. It is because they cannot afford to live. If the government wants to stop the declining birthrate, it has no choice but to increase the number of people who are able to marry and have children. The government’s birthrate reduction measures have misunderstood the essence of the problem.

In addition, an emerging political party made a great leap forward in the recent Upper House election. The reason for this is often attributed to the support for exclusionist populism, but this is also misguided. It is assumed that the impoverished middle class has reached a considerable volume, and their dissatisfaction is approaching a critical point, leading them to reject the established political parties.

I sincerely hope that these issues will be seriously discussed in the extraordinary Diet session this fall.