The collection of Children and Childrearing Support Allowances started in the form of an additional charge on healthcare insurance premiums. The additional amount is merely several hundred yen per month on average for employees covered by employer-based insurance, but social insurance premiums for individuals and companies have been raised several times over the years. Rising social insurance premiums affect more than just the net income of working generations. They are also contributing to a decline in the potential growth rate of Japan.
Looking at changes in the revenue structure of the general government, including both national and local governments, consumption tax revenue increased by nearly 2 percentage points in proportion to gross domestic product (GDP) as a result of the two consumption tax hikes implemented since 2000. Revenues from income tax and corporation tax also increased by a combined 2 percentage points, but the increase in social-security burden on individuals and companies is the largest increase at 4.3 percentage points.
The latest Economic Survey of Japan recently published by the Organisation for Economic Co-operation and Development (OECD) points out that Japan’s consumption tax rate is lower than other major countries and recommends a phased increase in the consumption tax rate by 1% until it reaches 18%.
Many people would likely feel that 18% is rather high. However, the White Paper on the Japanese Economy and Public Finance published in 2001, when the government debt was much lower than the current level, stated that a consumption tax rate equivalent to 23% would be necessary to achieve a long-term fiscal balance. Many other studies likewise concluded that as population aging progresses, Japan would need to raise the consumption tax rate to around 20% or higher in order to ensure the sustainability of Japan's public finances.
Increases in public burdens in any form put downward pressure on economic growth rates, but the impact of consumption tax is relatively small. Compared with income tax or corporate tax, consumption tax has only a limited detrimental effect on labor supply and investment and therefore its adverse impact on economic growth is small. There is essentially a consensus among experts, and the OECD report makes the same point.
If Japan intends to finance the ever-increasing social security expenditures that accompany an aging society, and to strengthen measures to address the falling birthrate, a permanent source of revenue will be needed and some form of burden on the people is inevitable.
From the perspective of preventing a further decline in the potential growth rate, an increase in burdens centered on consumption tax would be preferable. Nevertheless, public resistance to a consumption tax rate hike is very strong. In recent national elections, many of the political parties have advocated lowering the consumption tax rate or eliminating it entirely, doing their utmost to avoid raising the rate.
This has resulted in continued increases in social security contributions, for which political resistance is relatively small. Social insurance premiums are not taxes, but they have an adverse impact on labor supply and investment. In this respect, their impact on economic growth is similar to that of income tax and corporate tax.
The burden of the consumption tax is proportionate to spending and therefore upper-income earners and large asset holders tend to pay more in absolute terms. However, consumption tax does not have an income redistribution function and is often criticized as regressive, although not in as significant a manner as that for tobacco tax. If consumption tax is positioned as the main source of increased public burden, it would need to be combined with other policies targeting low-income households in order to prevent widening income inequality.
What should be considered as part of comprehensive social security and tax reform is how to combine a larger share of government revenue coming from consumption tax with refundable tax credits policies. Such a policy mix is a rational way to balance economic growth and income redistribution.
>> Original text in Japanese
* Translated by RIETI.
June 19, 2026 - Published in Nihon Keizai Shimbun's "Economist 360° Perspective"
