Higher Taxes Are Inevitable

Two months have passed since the Great East Japan Earthquake, but there is still no schedule in place for recovery. On top of the natural disaster of the earthquake and tsunami came the crisis at the nuclear power station in Fukushima; the situation there has still not been brought under control and is setting people’s nerves on edge. The government calculates that damage from the natural disasters alone will come to ¥16–25 trillion, and it is estimated that a budget of around ¥10 trillion will need to be earmarked for recovery.

Capitalizing on People’s Urge to Do Something to Help

Where will funding for reconstruction come from? A preliminary supplementary budget of more than ¥4 trillion has already been passed. Of this amount, ¥2.5 trillion has been temporarily appropriated from pension funds. Prime Minister Kan Naoto and his government like to stress that they have not issued any new national bonds, but this is just a stopgap measure. It will not be enough to address the real problem. Sooner or later, it will be necessary to come up with revenues on a larger scale to fund reconstruction under supplementary budgets.

Fortunately, the Japanese people have come together and shown remarkable levels of sympathy and concern since the disaster. Whether you look at the amounts raised in charitable donations or the numbers of volunteers who have rushed to the Tōhoku region from all over the country in the wake of the disaster, the desire on the part of the people to do something to help is unmistakable. When it comes to reconstruction, there is a remarkably strong sense of solidarity. I believe that this sense of solidarity and community holds the key to securing the money we need to fund reconstruction efforts. In this respect, a comparison might be made to the supplementary “solidarity tax” levied in Germany following reunification in 1990. The following three important measures deserve serious consideration.

Limit Deflationary Effect by Channeling Funds to the Private Sector

First of all, the budget needs to be adjusted to provide funding for reconstruction. In concrete terms, this will likely mean doing away with indiscriminate handouts, such as the child benefit, and shifting the distribution of public works projects in favor of areas affected by the disaster. People will surely give their support and understanding to policies like these.

Second, the issuing of a substantial volume of government bonds to fund recovery will be unavoidable in the near term. By appealing to people’s sense of solidarity, the government should be able to find a market for these bonds, even if conditions are less than ideal.

Third, though this will probably come somewhat later, it is bound to be necessary to increase taxes. Again, I think taxpayers are more or less resigned to the necessity of this. Possibilities include a supplementary levy on income tax or corporate tax or an increase in the rate of the consumption tax. Since the revenue from these increases will be returned straight back to the private sector to fund reconstruction projects, there should be little risk that these policies will exacerbate Japan’s problems with deflation.

(Originally written in Japanese on May 1, 2011.)