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Measuring The Burden of Indirect Taxation Including Consumption Tax in Japan by Income Group

Author: YOSHIMI ADACHI, TOSHIYUKI UEMURA, and YURIE SAITOH
Published in PFM, Vol. 17 No. 3

A consumption tax was introduced in Japan as a means to secure financing for social security programs. Japan introduced this as a value-added tax in April 1989 in response to its aging socie-ty. The tax has increased from 3% in 1989 to 5% in April 1997 and 8% in April 2014. A further rate rise to 10% is planned for April 2017. While consumption taxes are regressive, excise taxes also place a burden on household finances. In this study, we estimate the portion of income cap-tured by consumption and excise taxes for different income groups, considering the proportion of the tax burden associated with excise taxes. The results indicate that regressivity is present for both consumption and excise taxes. In particular, indirect taxes on food are considered highly regressive, giving grounds for measures aimed at reducing the tax burden of low-income earners. Accordingly, we quantify the redistributive effects of several policy patterns aimed at lessening indirect tax burdens. For taxes on food, the redistributive effects of reduced taxes, zero rates of taxation, and tax refunds were not significant. This is because these measures lower the tax bur-den across all income groups and do not target only low-income earners. As a result, alleviating the regressivity of indirect taxes requires social security policies closely targeted at low-income earners.

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