abolish consumption tax

This doccument proposes that consumption tax is relatively inefficient for the tax collection method and harmonising business cycles so then offers to abolish the consumption tax in Japanese case.

Speaking of consumption tax in general, which includes the turn-over tax introduced former West Germany, sales tax used in Japan, and the Value-Added Tax (VAT) which is used the European Union (EU) member states, this kind of indirect tax system tends to be inefficient to gather a stable amount of tax revenue. The reason is that the demand of comodity itself is quite fluctuant so that the revenue changes overtime inevitably. The tax on consumption, especially the sales tax, symply increases the price of necessities so than individuals' utility goes down. This causes to the moral hazard which denotes that although economy is supposed to create the individuals' well-being the consumption tax discourages the well-being of those. Even the turn-over tax and the VAT, which are regarded as less regressive than the sales tax, not only to cause the moral hazard but also is still regressive. These two kinds of consumption tax cause the disturbance to account how the value in accumulated and to judge if some goods or services need to be taxed more than others.

Furthermore, the accountancy can be easily biased by firms selling consumptions. The sales tax is the most notorious because it does not clarifies whether one comodity is on the final good or the intermediate good. The turn over tax encourages the merging firms and creates more monopolised market so then results in inefficient market pricing. The VAT which is popular and has a good reputation among the world is high controversial. The VAT is successful to prevent encouraging merging and less regressive than the previously mentioned two types of consuption tax. However, the VAT merely taxes on consumptions with the number of sales among intermediate market. Therefore, the VAT does not precisely judge whether consumptions are necessities or luxuries and need or need not to be taxed.

On the other hand, in terms of the macroeconomics perspective, consumption tax tend to stagnate the aggregate demand level. The consumption level correlated to the income level is quite hetero-scedastic, which implies the variance varies across different level of variables. The consumption level of individuals with the higher income is varied where as those with the lower income level spend most of their income for their consumption. This clarifies that the average level of merginal propensity to consume does not change across the income level. Therefore, the tax on the consumption reduces the level of disposable income of individuals with the lower income level meanwhile those with the higher income level may substitute their expensive consumptions or their saving income into inexpensive consumptions.


Neoclasscal economists may claim indirect taxation in general including consumption tax is less likely to disturb equity than direct taxation as this is relatively burdened by means of the right to spend. Neoclassical economists tend to put priority on equity of individuals' income, therefore encouraging saving, and the right to spend (the other word is "pay as spend") rather than the ability to pay. This is agreed as long as the indirect tax is not the consumption tax because this essay is going to explain about the necessity of introducing the emission tax due to reduce the negative externality. However, the consumption tax increases the negative externality unlike other forms of indirect taxation. Furthermore, although the majority of neoclassical economists support small government with little bureaucracy the consumption tax which they support, as a matter of fact consumption tax requires a high government expenditure on the sophsticated bureaucratic system to account the tax collection and increases the cost due to the risk of assymetric shick of aggregate demand level among regions.




Focusing on the microeconomic aspect, consumption tax distorts equity despite the supporters of consumption tax put priority on equity. In particular, a nation exporting a large number of commodities produced in monopolistic or oligopolistic firms has to transfer the revenue from the consumption tax burdened on these commodities back to these firms in order to avoid the tax export. In this situation, these firms gain an extra amount of revenue from this tax revenue transfer as much as they export more than or as much as they sell domestically. This results in transfering revenues from medium and small firms exporting little to those exporting a lot. On top of it, a nation having a huge tourist industry openned up to the global market has a large proportion of tax exportation or needs a bureaucracy to enable foreign customers to refound their consumption tax. As a consumption tax becomes a huge proportion and/or complicated like the VAT, it eventually requires much more complicated bureaucracy to account the process of consumption tax and the right amount of tax refound. If the refound does not take place, it might simply create the distortion of equity across nations because foreign comers bear an extra duty which may not contribute for their public service. All in all, consumption tax tends to exploit the revenues from medium or small sized firms and encourage a monopoly and distortion of equity among firms as long as these two factors are notable. In particular, Japanese major car making entreprises and IT corporations are notorious to take an extra revenue from the tax transfer because of their enourmous scale of exportation level.

From the macroeconomics point of view, the consumption tax disharmonises the business cycle among regions in a nation. Unlike direct taxes, indirect taxes cannot vary their level of taxation across different regions. Indirect taxes are collected by refering tp the total revenue of each individual firm and extremely difficult to settle a bureaucracy varying the different level of indirect taxes across regions depending on their own business cycle. If an indirect tax is inelastic, for example the tax on habit formings, this has little influence on the business cycle. The indirect taxes burdened on roads used across different regions, and petrol and electricity used for transportations going across regions have to be equall across regions. However, consumption tax is an elastic indirect tax, its level of tax burden does not have to be same across regions unlike taxes on roads, petrol, and electricity, although it is extremely diffcult to vary the level, and has an influence on the local business cycles.