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Politics

Japan scrambles to blunt the pain of consumption tax hike

Home and car buyers to receive incentives as levy rises to 10%

As of now, Japan's homebuyers will face a 10% tax on purchases that close on or after Oct. 1, 2019. Cars and homes tend to experience the greatest fluctuations in demand when taxes are raised.

TOKYO -- Japan is considering tax reductions on home and vehicle purchases to ease the sting of a consumption tax hike planned for next year, devising pre-emptive steps to ensure additional revenue does not come at the cost of economic growth.

With the consumption tax set to climb from 8% to 10% in October 2019, a team under the cabinet secretariat is drawing up a comprehensive set of stimulus measures to prevent the severe economic fallout like that brought on by past tax increases.

Having delayed the promised tax increases twice for fear of an economic slowdown, Prime Minister Shinzo Abe does not believe doing so again is politically feasible. His goal now is to highlight his dual commitment to fiscal health and economic growth.

A central proposal calls for expanding a tax deduction for home loans, which currently lets homebuyers cut their tax bills by as much as 5 million yen ($45,660) over the course of a decade. Options include increasing the amount of the deduction in October 2019, or extending it beyond December 2021, when it is now set to expire.

As the law stands, buyers will incur a 10% tax on residential property purchases that close on or after Oct. 1, 2019.

The government already has a plan to scrap a 3% tax on automobile purchases when the consumption tax rises, replacing it with a 0%-to-3% tax based on the vehicle's fuel efficiency. A redesign of this new tax has also been proposed to further reduce buyers' tax exposure.

Costly durable goods such as cars and homes tend to experience the greatest fluctuations in demand when taxes are raised, as consumers rush to beat the deadline and hold back on purchases for some time after higher rates take effect. With these compensatory tax cuts, the government aims to smooth out these swings in personal consumption, which accounts for 60% of Japan's gross domestic product.

The team drafting these measures aims to have them included in the government's annual economic and fiscal policy management plan, to be drawn up around June. Details of the policies are to be decided by the end of the year.

Preventing an economic slump in the wake of the tax hike is imperative, as the Abe government seeks to maintain growth even while putting Japan's fiscal house in order. 

The government is already planning to pour roughly 2 trillion yen into offering lower tax rates on food and daily necessities and expanding free education. The tax is expected to generate 5 trillion to 6 trillion yen in fresh revenue. Some have called for spending the remaining 2 trillion to 3 trillion yen in the first year of the tax hike to offset the impact.

The government will also allow companies to gradually reflect higher taxes in their prices starting before the increase takes place. When the consumption tax rate was raised from 5% to 8% in April 2014, companies were barred from offering promotional discounts to offset the increase, causing prices to jump sharply when the new rate took effect. Now, the government is looking at changes to that policy, as well as to how it monitors the passing of tax hikes on to consumers.

One recommendation is that retailers display tax-inclusive prices, so as not to draw consumers' attention to the increase. This is seen making price increases ahead of the tax hike easier to implement. In Europe, gradual, staggered price hikes have helped smooth out fluctuations in demand and consumption around tax hikes.

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