A “Zero Food Tax” Could End Up Becoming a Tax Increase
One of the biggest problems with the Chairperson ONODERA’s proposal to cut the consumption tax on food for only two years is that it could actually result in a higher overall tax burden for the public.
Unlike income tax or local resident tax, Japan’s consumption tax is levied on businesses, not directly on consumers. Whether prices actually fall depends on each business’s pricing strategy.
That means there is no guarantee that prices will drop by the full amount of the tax cut. Studies of European VAT reductions have found that, on average, only about 70% of the tax cut was passed on to consumers through lower prices.
Even if prices do not fall enough, the tax rate would automatically increase from 1% back to 8% in April 2029. Raising taxes during an economic slowdown would likely hurt the economy.
The proposal would also increase the burden on many farmers and other small businesses that currently use Japan’s tax exemption or simplified tax system. Because they would lose eligibility for input tax deductions, they could face hundreds of billions of yen in additional tax costs.
By contrast, the Democratic Party for the People’s proposal—a cut in the local resident tax combined with a social insurance premium rebate—would provide at least ¥36,000 per person each year in meaningful relief, delivered quickly and sufficiently. It would also serve as a smooth transition toward a future refundable tax credit.
The choice is clear: which policy will do more to reduce the financial burden on the Japanese people, especially working-age households?
As discussions continue, policymakers should carefully compare the evidence and choose the policy that delivers the greatest benefit to the public.