Consumption Tax Cut for Campaign Agenda

Consumption tax cut appears to be one of the important talking points in coming election of the House of Representatives, which is expected to be called by Prime Minister Sanae Takaichi. New party by opposition powers, Centrist Reform Alliance (CRA), is going to include consumption tax cut for foods in their campaign platform. Takaichi also considers to embrace that policy for the election, receiving request from Japan Innovation Party (JIP). However, consumption tax cut has negative aspect on her government. 

Consumption tax cut was one of the main issues for 2024 Upper House election. As some opposition parties demanded total abolition of the tax, the Constitutional Democratic Party of Japan (CDPJ) and JIP argued that the tax rate should be 0 percent for foods. The Democratic Party for the People (DPP) proposed halving the tax rate from 10 percent to 5 percent. As the leading parties at the time, the Liberal Democratic Party (LDP) and Komeito did not have any plan to cut the tax.

 

The structure of parties has changed in Takaichi administration. Komeito changed its stance to seek consumption tax cut. Komeito and CDPJ agreed on including consumption tax cut for foods in campaign platform of CRA, a new party which was established in the Lower House by those two parties. They appeal to the voters that the tax cut is their main issue to guarantee their political stance of “people first.”

 

The JIP also insists on consumption tax cut for foods, inserting a sentence in the coalition agreement with the LDP that they would consider legislative action to exclude foods from imposition of consumption tax for two years. JIP is going to include the policy in their campaign platform for coming Lower House election and urge the LDP to embrace that policy as a campaign promise.

 

LDP has been reluctant to take consumption tax cut as their policy, because it would lose important tax revenue. However, Takaichi herself has been supporting the idea of reducing burden of taxpayers as a candidate of LDP presidential election in 2025. After taking office of prime minister, she did not refer to consumption tax cut, while she upholds her economic slogan of “responsible and proactive public finances.”

 

Nevertheless, Takaichi began to consider consumption tax cut for one of the items in LDP campaign platform to keep moderate relationship with the coalition partner. Consumption tax cut for foods may cause 5 trillion yen of annual shortage in national revenue. If she introduces the tax cut, she will need to find an alternative fiscal resource. Takaichi has already agreed with the DPP on raising threshold of imposing income tax to 1.78 yen of annual income, which would reduce national revenue by 650 billion yen.

 

There is a concern that the tax cut further exacerbate financial balance of the government, which may invite a displeasure of stock market. The market rallied in new year trades, expecting positive impact of Takaichi’s economic policies. Consumption tax cut may bring back worries on Takaichi’s irrelevant handlings of spendings. She will need to carefully deliberate the impacts that the tax cut may bring.

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