In the run-up to the House of Representatives election on February 8, the ruling and opposition parties made campaign pledges to reduce the consumption tax rate or consider doing so.
While the Liberal Democratic Party (LDP) and the Japan Innovation Party, which constitute the ruling coalition, declared that they would “accelerate debate” on the consumption tax with a view to reducing the tax rate for food products, currently at 8%, to zero and keep it there for two years, the Centrist Reform Alliance, the main opposition force, proposed reducing the consumption tax rate for food products to zero on a permanent basis. Among other opposition parties, the Democratic Party for the People pledged to lower the overall consumption tax rate to 5% and keep it there until the wage growth rate becomes stabilized at a level 2% higher than the inflation rate, and Reiwa Shinsengumi and the Japanese Communist Party advocated the outright abolition of the consumption tax.
Economists have been critical of these moves toward reducing or abolishing the consumption tax. According to a panel survey of economists conducted jointly by the Japan Center for Economic Research and Nihon Keizai Shimbun, around 90% of the economists polled expressed a negative view toward lowering the consumption tax to zero for food products. Among the reasons cited for the negative opinion were concerns over the risk of the government’s fiscal position deteriorating further due to a decline of 5 trillion in annual tax revenue and adverse effects on the restaurant industry, which would not benefit from the tax cut.
Fundamentally, food prices are determined by the supply-demand balance in the market. There is no guarantee that food prices would fall by a margin commensurate with the reduced tax rate. In Britain and France, consumption taxes on hotels and restaurants were reduced during the global financial crisis and COVID-19, but evidence demonstrates that only a portion of the benefits of the tax reduction were passed on to consumers.
Even so, both the general public and politicians are hostile toward the consumption tax. It is said that compared with other taxes, the burden of the consumption tax is felt more acutely by those who pay the tax. Indeed, at most retail shops, prices are indicated on both tax-included and tax-excluded bases. Although displaying tax-inclusive prices became mandatory in the spring of 2021, dual display with pre-tax pricing is still allowed. Consumers are thus made aware of the consumption tax potion that makes up the difference. This is a significant contrast to income tax and social insurance payments which are typically deducted automatically without individuals being constantly reminded of the payment amounts and remain nebulous unless they actively check their salary or other income statements.
Having such an acute experience of the tax burden can itself encourage the public to scrutinize the government’s fiscal management and to call for fiscal discipline to prevent wasteful spending. However, politicians try to avoid being subjected to such discipline and tend to prefer to secure financial resources in ways that do not make the tax burden so obvious to the public, such as deficit financing.
If the fiscal burden on the people is distinguished between “visible burdens” and “invisible burdens,” the consumption tax is a typical example of the former category. On the other hand, the corporate income tax falls under the latter category. The burden of the corporate income tax may appear to be entirely shouldered by profit-making companies, the reality is quite different. From a company’s perspective, taxes are just another production cost. Like raw materials costs, they can be passed on to product prices, shifting the “cost” to consumers. Meanwhile, if companies move business operations abroad in order to avoid high corporate income taxes, the burden is shouldered by the labor market. In either case, it is difficult to clarify the real situation of the tax burden.
There is also a lack of clarity with respect to the case of deficit financing, which means the issuance of additional government bonds. Even though government debt may be repaid through future tax increases, it is unclear who shoulders the burden and when. Even if the negative impact of deficit financing appears in the form of inflation, it is difficult to distinguish it from other factors, such as increasing energy price. At any rate, while deficit financing may be politically convenient, the ensuing fiscal burden remains in some form or other.
Ultimately, tax-cutting populism merely moves the fiscal burden resulting from tax reduction from the visible category, which includes the consumption tax, to the invisible category, which includes deficit financing. Over the tax reduction issue, which will be discussed in a future cross-party “national council,” what is needed is a “responsible” decision that resists tax-cutting populism.
>> Original text in Japanese
* Translated by RIETI.
February 21-28, 2026 Weekly Toyo Keizai
