Low tax on food will hurt the poor, say economists

by and

Staff Writers

Political negotiations between the nation’s ruling coalition are approaching a showdown over the unpopular consumption tax, which is set to rise to 10 percent from 8 percent in April 2017. A sweetener being considered has drawn scathing criticism from many economists.

The ruling Liberal Democratic Party and Komeito are in heated negotiations over a proposed low rate on fresh food and certain processed edibles to cushion the blow for low-income households. They are working toward a self-imposed deadline for agreement on Thursday.

Economists sampled oppose the proposed tax relief, dismissing it as a populist policy aimed at drawing votes ahead of the Upper House election next summer.

They say the flip side of cheaper food is lower social support, and this means low earners are ultimately being conned.

A special reduced rate for food products may sound attractive, but they say it would benefit the rich and eliminate more effective policy options to help struggling families directly.

“High-income people would benefit more. It’s not a (good) measure for low-income people,” said Takao Komine, a noted economist and professor at the graduate school of Hosei University in Tokyo. “That’s why economists are opposed to the plan.”

Komeito, the LDP’s junior coalition partner, has strongly pushed for low tax on food — a promise it made voters in previous elections.

But Komine says high-income households would benefit proportionally more because they tend to buy more expensive items, such as wagyu beef.

“People would be happy because (food) prices in their everyday life would be lower. But they don’t realize high-income people would benefit more,” he said.

Daily newspaper Asahi Shimbun reported that the LDP is now considering securing ¥800 billion a year in the government general account to maintain the current 8 percent rate on fresh foods and certain processed food and drink products.

But the government would finance about half of the ¥800 billion sum by abolishing planned upper limits on how much low-income households have to pay for public medical, nursing and child care.

Abolishing a system that would specifically reduce the burden faced by low-income households and introducing a special low tax rate that benefits high-income households is like “putting the cart before the horse,” Komine said.

Komine’s opinion is echoed by other economists. On Tuesday, a group of private-sector economists and tax experts, including Aoyama Gakuin University Professor Miki Yoshikazu and Nihon University professor Kazuo Mizuno, released a set of proposals for tax reforms. The group expressed opposition to introducing a low sales tax rate for food and drink.

In its policy paper, the group called on the government to adopt measures that directly reduce the financial burden borne by low-income households, such as a refundable tax credit system — something used in many Western countries. Under that system, low-and-middle-income families receive a lower tax bill and the state may even make payments to them if they owe no tax at all.

The group also said introducing a special low rate for certain products would intensify lobbying by interest groups in the food industries, and politicians may take advantage of it. “The adoption of a low tax rate . . . would mean the revival of the old politics to buy votes with tax (reductions),” the group said. “This system should not be adopted, both for political and theoretical reasons.”

Komine said he regrets the apparent lack of understanding by taxpaying voters and the populist attitude of politicians. “When you conduct a poll, a majority of voters say they support the introduction of a special low rate” for foods, Komine said.

“Now, they are doing politics only based on media poll results. If politicians are like that, we don’t need politicians. They just would do whatever a poll would say.”

Takehiko Shirai, senior manager of Hitachi Consulting Co., calls the reduced tax rate “nothing more than populism, a very stupid system,” noting that the planned consumption tax hike is designed to finance welfare, or support the needy, in the first place. “No one benefits from reduced rates. If (the tax on) foods becomes 8 percent, it’s just a matter of saving a few hundred yen a month,” Shirai said. “It’s only designed to make people happier by making them think prices are cheaper that way.”

But he welcomed the ruling parties’ decision to introduce a new invoice system for transactions to ensure that the multi-level sales tax is levied accurately.

Millions of small businesses are currently believed to enjoy extra profit from the loophole in the current system that essentially turns a blind eye to low-turnover entities, giving them a windfall in the form of lower dues to the state. The companies know the technique as eki-zei (profitable tax).

This would be eliminated under the invoicing system. “I think it’s a very good system . . . no doubt a great system, especially to address the eki-zei problem,” Shirai said, referring to the windfalls that small business are believed to enjoy due to flaws in the current consumption tax system.

Under the invoice system, the government will require every transaction to be accompanied by an invoice that includes details, such as a seller’s unique identifying number, the sales price, consumption tax rate, and a breakdown of individual items.

The ruling coalition hopes the invoices will reduce instances of inaccurate accounting. Many businesses are involved in the stages of getting a product to a consumer: The materials producer, manufacturer, wholesaler and retailer are all obliged to levy 8 percent consumption tax on their individual added values.

But businesses with annual sales of ¥50 million or less are allowed to pay taxes based on a simplified calculation formula, not on their actual accounts. In many cases those businesses end up paying a lower tax rate than larger businesses. Small businesses with annual sales of ¥10 million or less are exempt from rendering the consumption tax to authorities.

The invoice system has faced resistance from businesses, which are reluctant to handle paperwork involved in specifying additional details. But Shirai dismissed such concerns.

“It’s not like businesses haven’t done something like this before. They are already issuing bills to buyers,” he said. “Adding tax rates and other details on a similar slip wouldn’t be such a major hassle.”

Motoyoshi Yoshiki, another senior consultant for Hitachi Consulting, added: “It’s the simultaneous introduction of the reduced rate that makes things more complex. . . .The invoice system would help alleviate that.”

  • tisho

    How is retaining a bigger share of your own earnings going to hurt the poor?? The most ridiculous way of thinking ever. We will take 60% of your income, because if we take only 30%, that will hurt you! My goodness.. who are these economists and how did they became an economists in the first place? Oh wait, let me guess, they must be graduates of keynesian school of economics?

  • Paul Johnny Lynn

    Admittedly I’m no economist, and not great at maths; but considering food and such is my second biggest expense after rent I’d appreciate that situation NOT changing!

  • A.J. Sutter

    I’m really confused by this as well. First of all, it isn’t clear to me that these economists are thinking about timing. Correct me if I’m wrong, but doesn’t a tax credit or refund come once a year, whereas the layout on a higher tax is in effect a daily expense?

    How are people supposed to make it to the end of the month, much less wait for a long time to get a big lump refund? Plus, experience with various government cash payment schemes (as well as basic behavioural economics) suggests that people blow through lump payments pretty quickly — better that they should have their savings in smaller amounts and over a longer period.

    Another bit of logic that escapes me is it seems as if they are saying that in order to tax the rich, we have to tax the poor as well. If they’re so worried about losing revenue from the rich, why not just increase the progressive tax rate?

    Finally, and this one really would baffle me if I didn’t understand that our current administration is really a government of the Keidanren rather than of the people, why are none of these economists complaining about reducing the corporate tax rate?

    Companies are already sitting on hordes of cash, without distributing it to workers. Why will allowing them to keep more cash suddenly change their behavior in a good way? And since there are fewer and fewer people who are truly employed by corporations these days, even if companies had more largesse there is a large contingent of the labor force that wouldn’t be directly affected by that. Plus, what about all the seniors who don’t earn wages any more at all? The corporate tax could pay for programs that would benefit them — but according to economists we should get rid of that. A higher tax on food could effectively mean they starve for a few days at the end of each month — but that’s just what they need, economists seem to be telling us.

    I do buy the scholars’ argument about populist politics — it does seem that’s a lot of the motivation for having this discussion now. But the problem with all these economists is that they’ve never been out of a job themselves. When a senior manager of a consulting company dismisses a lower tax by saying “it’s just a matter of saving a few hundred yen a month,” he obviously don’t have any appreciation of how important that could be to an impoverished senior citizen or a single mother.

  • Al_Martinez

    Make up the 800 billion with a increase in corporate tax. Then you can keep the reduced tax rate on food and the folks struggling around Japan are not hurt more. Sure, the rich are helped, but that is the nature of a flat tax such as the consumption tax–it is a regressive tax. The rich don’t really care if it’s 8 or 10 percent on food.

  • Toolonggone

    >Takehiko Shirai, senior manager of Hitachi Consulting Co., calls the reduced tax rate “nothing more than populism, a very stupid system,” noting that the planned consumption tax hike is designed to finance welfare, or support the needy, in the first place.”No one benefits from reduced rates. If (the tax on) foods becomes 8 percent, it’s just a matter of saving a few hundred yen a month,” Shirai said.

    Typical mindset of business owner preaching market populist rhetoric. To me, it sounds like a message to working class and those living in poverty: “Your financial status is NOT out problem. Deal with it, socialist peasants!”

  • Doubting Thomas

    The working class wouldn’t benefit from food being tax exempt? What sort of idiotic backwards logic is this? Just how much social support are people (under 60) getting that you can justify making everyone’s living expenses higher, but disproportionately so for the young poor? Tax high-speed trading and stock speculation at a tiny, tiny rate and you could pay for everything you want while also stabilizing the market.

  • GBR48

    What the economists are suggesting, is that funding a reduced rate for some food benefits everyone (as rich people buy food too), but it would be paid for by reducing benefits for the poor. So yes, it would then be bad for the poor as money previously earmarked for them would be used in part to reduce costs for things purchased by the rich.

    Instead they want to direct help to the poor, and only the poor, in a small tax credit.

    The politicians want the first option, which has the most PR potential, the economists are checking the details and doing the sums.

    Both ignore some of the basics:

    Almost all of this will considerably ramp up everyone’s paperwork and involve implementation costs for any computerised system of invoicing.

    The consumption tax is fundamentally flawed: it is too low for a developed country. Many countries have a much higher sales tax and zero-rate food as an essential. They may also zero-rate other necessities and books (access to education). Poor people buy far fewer expensive consumer durables and fashion items, and a much higher percentage of their outgoings are on food, so they benefit more from the differential tax rates (as long as changes are not funded from their benefits).

    Given that the consumption tax is so low, and that the increase is so small, it is questionable whether there is any point in a staggered rate. 2% on a limited range of food products should not push vast numbers of people into poverty. Food isn’t particularly expensive in Japan, whilst other things, like housing and education costs, are.

    An annual lump sum to cover this 2% (the economist’s option), would be fairer, as it would only be paid to the poor. But it does need to be paid in advance, because poor people simply do not have cash reserves, something economists, politicians and comfortably-off people often forget.

    Other options would be zero-rating all foods or edible items that cost less than 200 or 300 yen. The rich tend to eat a lot of expensive food products. Although the poor are often urged to buy in bulk to save money, few have the cash reserves to do that, and Japan doesn’t have a culture of bulk-buying the way the West does (partly for reasons of space). So, the poor tend to buy small amounts of cheaper food products. Zero-rating is much less fuss than multiple tax rates.

  • Shiki Byakko

    Japan has the highest corporate tax in the world (well, second to Cameroon by 0.5%). If you try to start a company in japan, you get smashed by the taxation system.

    The high bracket on individual taxation is 50%, and payroll taxes are more than 25%.

    Each one of these numbers are one of the highest in the world.

    The only taxation that was low was the Sales tax, but it has constantly increased, each time with the same argument that there isn’t enough money.

    Japan is one of the most heavily taxed countries on the world, the 3rd world economy, and they still do not have money.

    My annual income is lower than the average in japan, and they still take more than a 4th of my paycheck every month.

    This guy talks about “benefits”, but people on their 20s paying their pensions today will loose about 22,800,000 yens in payments by the time they retire, and that’s just if they are able to get their whole pension, which most people won’t.

    Hospitals in japan are full of old people with minor problems which go almost everyday to see a doctor, in a country with very few practicing medical doctors because of regulations which make being a doctor in japan economically not sound. You need to get a “recommendation” to be able to go to a hospital in many cases, and even then you are made to wait hours for someone to see you for 3 seconds and then weeks to get any kind of result.

    People who REALLY need a safety net, like homeless people, racial minorities and people with disabilities, are constantly discriminated by the system. Single mothers are starving in this country, which has the LARGEST percentage of single parent families living on poverty in the whole OECD.

    Maybe, just MAYBE the Japanese government is running an impossible budget, which is worsen every time they save zombie banks and companies, which are the main reason japan hasn’t being able to recover after the bubble crash of the 80s.

    Just look how the GDP contracted when they raised the sales tax, and it hasn’t been able to recover ever since.

    Making an exception to “food” will not help in the sense that raising taxes is still an stupid option that is going to hurt everyone, except for politicians and their friends.

  • thedudeabidez

    it is rather astounding that there are economists in Japan who don’t seem to grasp the very basic idea of a “regressive tax”. Taxes on daily necessities invariably take a proportionally larger bite out of those with smaller paychecks. if this is the quality of the nation’s top economists, it’s no surprise the country has been in and out of recession for the past two decades.

    The idea that all the money from this tax will be used only for social welfare benefits is just a flat out lie. In their “surplus budgets”, used to stimulate the economy (which weakened in reaction to the tax hikes), the Abe administration has already spent more than five times the amount they projected to take in from the first year of the consumption tax boost. They will also be looking at decreased revenue by cutting corporate tax rates. Where will the money to pay for this come from? Never mind the Olympics. Yet we can’t give the working poor a break on their food bills, already higher due to the weakened yen, another reason to thank Abenomics.

  • INcisacULT

    so…

    low tax will hurt the poor

    because

    the rich will benefit more.

    ok, let me read that 10 times…

    i still don’t get it.

    anyone?

  • jorzef

    I shan’t be sending my son to Hosei University, that’s for sure. And I am glad I have never bought an Hitachi product.