I came across an article in the New York Times titled, “Tax Increase Proposal Raises Fear of Slowdown in Japan”. In this article, the author describes the two opposing viewpoints of an increase from 5% to 8% sales tax that Prime Minister Shinzo Abe is planning to implement in order to begin working towards diminishing Japan’s massive national debt. The tax is to be distributed evenly throughout all goods and services, in an effort to minimize changes to the recently thriving Japanese economy. Still, economists are worried that the drastic increase in sales tax is too much too soon, and that it will cause Japan to backslide into “the deflationary morass that has dogged it for 15 years” (Tabuchi).
In Stephen Martin’s “Industrial Organization in Context”, Martin describes Sakakibara and Porter’s theory that domestic rivalry causes success in the international market
. Sakakibara and Porter, which they support this assertion using evidence from the Japanese market. They found that “Japanese firms have a larger share of world exports the more they spend on research and development” (as cited in Martin), and this research and development is a result of firms trying to beat out other domestic competition.
How will the tax increase affect Japan’s firms in the international market? The fact that the sales tax is to be evenly distributed nationwide [better: is levied on all goods and services] suggests that domestic competition will remain the same, and thus the rivalry between firms in Japan will stay dynamic and active. According to Sakakibara and Porter’s assertion, this means that Japan will continue to be successful within the international market as well. However, we also have to think about how the increase in sales tax will effect how much money Japanese firms spend on research and development.
Since a sales tax across all goods and services is synonymous to a decrease in income throughout all consumers in Japan, it is reasonable to predict that the Japanese population will have less money for consumption, and will therefore consume fewer goods and services. m represents income. m/p1 is the maximum quantity that a consumer can buy of good 1, and m/p2 is the maximum quantity the consumer can buy of good 2. If m goes down, the budget line shifts inward, because the consumer cannot afford to buy as much of good 1 and good 2 as before. The nationwide sales tax is synonomous to a decrease in m for all consumers. Consumers’ budget lines have shifted inwards, and they
can will no longer afford to buy as many goods as before. This means decreased quantity of sales for firms, and since revenue=price x quantity, firms will have less revenue that they can use towards research and development. The amount of research and development in Japan is central to Sakakibara and Porter’s assertion about international success, and thus it is not unreasonable to suppose that although higher sales taxes will not decrease domestic rivalry, its effect on research and development could have negative repercussions for Japanese firms in the international market.