The ruling coalition parties plan to make a final decision by yearend on whether to introduce reduced consumption tax rates on certain daily necessities. Differentiated rates on daily necessities are introduced widely in other industrialized countries and have been advocated in Japan as a way of easing the burden of a rising consumption tax rate on low-income people.

But lawmakers should also carefully consider the problems inherent in such a measure, and weigh the demerits against its effects as they listen to opinions from various sectors.

The Liberal Democratic Party is cautious about introducing lower rates on certain goods, but has agreed to include the measure in its tax reform outline for fiscal 2014 at the strong urging of its coalition partner New Komeito.

Details such as when the step will kick in or what necessities will be covered are still up in the air. New Komeito is calling for introducing lower rates when the consumption tax rate rises to 10 percent from the current 8 percent in October 2015.

The two parties have spelled out several different options on what types of products will qualify for reduced rates and what accounting methods will be required for businesses. They plan soon to conduct hearings with representatives of various business sectors to be affected by the measure.

The need for lower rates on daily necessities is often emphasized as a measure to offset the regressive nature of the consumption tax — in which lower-income people pay a larger portion of their income in taxes than higher-income people do. But experts cast doubts on this remedy when certain cases are taken into account. They point out that if foodstuffs become subject to the reduced rates, the measure will benefit higher-income taxpayers more than lower-income people since the former typically spend more on what they eat.

A proposal by New Komeito last year called for making all food items, except alcoholic beverages and dining out, subject to reduced rates. If the current 8 percent rate continues to be applied to all these products when the overall consumption tax rate is hiked to 10 percent, estimated gains in government tax revenue will be pared by roughly ¥1 trillion.

Opponents of reduced rates on daily necessities say that such a revenue loss will defeat the very purpose of the consumption tax hike — to help pay for ever-increasing social security costs and to rebuild the nation’s fiscal health.

Reduced rates on certain daily necessities will create multiple tax rates on products, creating accounting headaches for businesses sorting out the different tax rates for the products they deal in. The invoice system used in European countries, in which the rate or amount of tax for each product is logged on an invoice, is opposed by business circles who expect it would increase paperwork, particularly for small and medium-size firms. New Komeito earlier proposed a simpler alternative that it says would minimize the additional accounting work, but no consensus has been reached on the matter.

As they grope for a decision on the issue, lawmakers in the ruling coalition parties need to examine whether the boon to low-income households will outweigh the potential drawbacks, or whether there are other ways of alleviating the impact of the higher consumption tax on low-income earners, such as tax credits combined with cash allowances.

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.