Low tax on food will hurt the poor, say economists

by Reiji Yoshida and Atsushi Kodera

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.”