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?

    • Doubting Thomas

      You’re thinking of classical economics, not Keynesian economics.

      • tisho

        Classical economics are based on free market and little government intervention, Keynesian economics are… not really economics at all. They believe that growth and wealth comes from consumption and not production, they have a completely false and absurd view of what inflation is, the only skill they have is to print money and that’s what they do – print money.

      • Doubting Thomas

        Trickle-down economics didn’t work then, and it doesn’t work now. Demand comes before supply.

      • tisho

        No other policy is more trickle-down than crony-capitalism , which favors only the wealthy and not the middle man. The wealthy LOVE regulations and big government, because only they have the money and resources to bypass or take care of them all, the middle man does not, so the big and wealthy know they would have no competition on the market if there were more stricter regulations chocking the middle man. Capitalism is based on supply and demand, gov. intervention is not. You better get your definitions straight.

      • jorzef

        You mean Dickensian 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.

    • thedudeabidez

      Actually, Abe is cutting the corporate tax.

  • 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.

    • A.J. Sutter

      Actually, some Japanese commentators have pointed out some other pertinent and obvious points:

      First, many countries have zero tax on food items.

      Second, there are a lot more poor people than rich people — another fact overlooked by the economists. So the fact that some rich people will save more when they buy expensive food is a red herring. Also, wealthier families tend to be smaller, and consume less food anyway.

      Lump-sum payments tend to get squandered on useless stuff. It’s a bad way to go. Just eliminate the tax on food, increase tax on things rich people buy (like expensive cars) or on their income.

      In any case, it appears the 2% differential that Komeito has been pushing for will win out in the end. But this story certainly shows off the world-class lousiness of Japanese economists.

  • 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.

    • Doubting Thomas

      Japan actually spends less on medical expenses per person than just about any other industrialized country. And people here are living longer and longer, so I don’t think you can really fault the medical system. That said, I hate having to wait for an hour behind dozens of old people every time I need to see a doctor about something. And they pretty much tell me to lose weight and shunt me out the door with only enough prescriptions to last 3-4 days, so I can’t say the system is perfect.

      But this is really more due to the lack of doctors, which could be fixed by paying for a decent scholarship system for excellent students.

      • Shiki Byakko

        The medical system has little to do with the reason why people live longer here.

        They have a very healthy diet and way of life, specially in the case of women.

        Just look up the fatality rates for cancer, they are high when compared to for example the US. The difference there is also that the genetic predispositions of the Yamato race is different.

        Japan spends less because they also have to do less.

        But if you have any serious or unusual medical condition, unless you know you way on the system, you have better chances going to another country with an free medical system, like the US or Mexico. And even if you know your way, you still have to wait, and remember to not get sick on the weekend, holidays, random day in the middle of the week when the hospital closes, or night.

        There is a lack of doctors in Japan not because there aren’t enough people studying medicine. Most people who study medicine, go to practice somewhere else or just plain end up working in a completely different field that actually helps them to survive.

      • Doubting Thomas

        I wasn’t talking about the fact that they live a long time here, but that they’re living longer and longer.

        God help you if you get cancer in the US and aren’t independently wealthy. It’s pretty much go bankrupt or die there.

        By the way, Germany has socialized medicine and has higher cancer survival rates across the board than the US despite. In fact, despite vastly higher costs the US has overall poorer medical outcomes than countries with socialized medicine for non-cancer conditions.

      • Shiki Byakko

        I don’t know about Germany, but in Japan you don’t have even the choice to go bankrupt, your only choice is in many cases just to die.

      • tisho

        The only reason health care and medicine is so expensive in the US is because of the government intervention in the sector which constantly drives the price up, same for the education. If you remove the government from healthcare, the prices will be adjusted to the market and people will be able to afford their healthcare without paying through a third party.

      • Doubting Thomas

        That’s laughable and has no basis in reality. The law of supply and demand are what make the prices as high as they are. The only way to keep healthcare prices at affordable levels (if you think that’s important) is to control the prices of services, require everyone to buy coverage, pay for talented people to become doctors, and use a single-payer system to negotiate for drug prices.

      • tisho

        Yes, the law of supply and demand is what makes the prices high, and why is the price so high then? It is because there is no competition among doctors and hospitals in the healthcare sector, because the US has a system called third party payer, which means the insurance company pays for your treatment, you don’t pay for it, and because you don’t pay for it, you don’t care about the price, just like you wouldn’t care about the price of gasoline would be if someone else always pays for you, and because of that, the hospitals can raise the price, and you don’t care, you don’t negotiate a lower price, there is no competition happening for your money, because you don’t pay. There is no gov. involvement in the laser surgery sector, and the prices are so much lower and affordable, same thing will happen with the healthcare if the gov. got out of the way and let people pay for their own service, then you create a competition and the prices will instantly drop. Same applies for the education, where the government guaranteed loans makes people who don’t even want to go to college to get an easy loan and go, and the universities respond to this extra demand by increasing the cost of education, if you remove the gov. loans, only people who can afford will go, and thus the unis will be forced to drop the prices by cutting unnecessary costs.

      • Toolonggone

        Health care and medicine are expensive because the current system apparently gives big insurance companies an overwhelming advantage over mid-to-small size health care industries in deciding/fixing the price. It doesn’t make any difference whether government is there or not. You can’t make the market competitive and fair to all healthcare industries– unless you fix the system that gives the executives of big billion dollar pharmas obscene profit out of ‘rigged’ business.

    • Doubting Thomas

      On another topic, Japan’s corporate rate is not the highest. The US has a higher nominal rate, at least it does now. Average rates aside.

  • 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.

    • thedudeabidez

      What was the impetus to get these peoples opinions and make it a front page article? Is the JT also pressured to become Abe-chaneru?

    • FunkyB

      I was about to post the exact same comment. I would add: where are the tax hikes on tobacco and alcohol (other than beer that is already taxed at about 35%)? Do these “experts” have any economic literacy at all? Cutting the corporate tax could almost be justified (in the long run anyway), but not if that means taxing food even more.

  • INcisacULT


    low tax will hurt the poor


    the rich will benefit more.

    ok, let me read that 10 times…

    i still don’t get it.


    • jorzef

      You need to imagine Dennis Moore on his horse Concorde

  • 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.