Measures for Introduction of Consumption Tax Cut

Sanae Takaichi government presented its draft of measures related to introduction of consumption tax cut for foods in April 2027 to the Liberal Democratic Party (LDP) and Japan Innovation Party (JIP). To prevent negative impact on some people, the government prepared special menu to support their businesses. However, it is still unclear how the government will find the fiscal resource to cover the loss of revenue.

Takaichi promised to eliminate consumption tax for foods to attract low-income voters in the Lower House election in February. Following the victory in the election, Takaichi Cabinet decided in August to reduce consumption tax rate for foods from 8 percent to 1 for two years, starting April 2027, and provide the rest of 1 percent to low-income families. When the tax rate will get back to 8 percent in April 2029, the government hopes to introduce new system of benefits, which depends on income of each family.

 

This benefit will be calculated based on the income every June and it will arrive at each family in the fall. The first issuance of the benefit in FY2029 was expected to be sent in the fall. But the consumption tax rate for foods will increase from 1 percent to 8 in April 2029, giving the people an impression that it will be a tax increase which Takaichi is afraid of. For Takaichi, popularity is everything. Takaichi government decided to deliver that benefit in the spring and fall only for FY2029.

 

The government offered some other measures to reduce the impact of the tax cut. Farmers with annual sales less than 10 million yen have been exempted from submitting earned consumption tax for their products. Although they could keep 8 percent of consumption tax for themselves, it will be reduced to 1 percent after April 2027. To compensate their loss of income, the government will distribute a benefit to those farmers.

 

Consumption tax cut for foods may threaten restaurant businesses, because tax rate for foods in restaurant will stay at 8 percent. But once those foods are taken out of the restaurant, the tax will be reduced to 1 percent. The government is going to support their finance and their effort to change business into take-out style.

 

In current consumption tax system, the revenue of 8 percent consumption tax is divided into 6.24 percent for national government and 1.76 percent for local governments. All the local governments will lose this portion of 1.76 percent after April 2027. The government will fulfill two-thirds of this loss of revenue in local governments. However, the local governments are still skeptical about their disadvantage as far as the national government has not determined the details of new tax system.

 

Takaichi received criticisms on lack of clear idea on fiscal resource for the tax cut. The possibility of further issuance of government bonds invited distrust of the markets on her economic policy. That is why Takaichi government insists that it will not issue any government bonds for the tax cut and will definitely resume the tax rate two years later. However, those measures look like afterthoughts to avoid decline of her approval rate.

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