Even a Fifth Grader Could Understand: Cutting the Consumption Tax Won’t Save Household Budgets!
August 8, 2025
X-2025-017E
In Japan, fifth graders learn about percentages in math class. Once they understand this concept, they should be able to answer the following questions.
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A family earned a combined income of 4 million yen this year. From their earned pretax income, 5% went to taxes, and another 15% to social insurance premiums. The family then used all the money remaining after these deductions to make various purchases. Their purchases were subject to a consumption tax, amounting 9% of what they spent.
Question 1: What percentage of the earned pretax income remains after taxes and social insurance premiums are deducted?
Question 2: What percentage of the earned pretax income does the consumption tax on purchased items represent?
Question 3: This family is planning a trip next year and wants to save money for it. They decided to save half of the money remaining after taxes and social insurance premiums were deducted, and use the other half to make various purchases. In this case, what percentage of the earned pretax income does the consumption tax represent?
Question 4: Which is greater: the consumption tax paid in Question 3 or the social insurance premiums deducted?
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Let’s check the answers to these questions, which fifth graders should be able to solve.
For Question 1, since taxes (intended to represent personal income tax and individual resident tax) and social insurance premiums together total 20% (= 5% + 15%), the remaining money (disposable income) is 80% of the earned income (pre-tax income).
For Question 2, the remaining money (disposable income) is 80% of the earned pretax income, and all of it is spent on purchasing items (consumption). Since 9% of that spending goes to consumption tax, the consumption tax paid equals 7.2% (= 80% x 9%) of the earned income (pre-tax income).
For Question 3, the remaining money (disposable income) is 80% of the earned income, and half of it (50%) is spent on purchasing items (consumption). Since 9% of that spending goes to consumption tax, the consumption tax paid equals 3.6% (80% x 50% x 9%) of the earned income.
For Question 4, the consumption tax paid in Question 3 is 3.6% of the earned income, while the social insurance premiums deducted are 15% of the earned income. Therefore, the social insurance premiums are greater.
Answering these questions should make it clear that reducing the social insurance premium burden is more important than cutting the consumption tax. The burden of social insurance premiums is heavier than that of the consumption tax. The above math problem can be solved completely using percentages, a concept learned in fifth grade, so the actual amount of annual income is irrelevant. (Although the above problem sets the annual income to 4 million yen, this figure is never used in the solution.) This is intended to show that not only low-income earners, but also middle- and high-income earners share the same household burden structure.
In reality, the burden of income tax and individual resident tax for low- and middle-income earners is only about as much as stated in the problem. Meanwhile, the social insurance premium burden for many people is around 15%.
On the other hand, the consumption tax burden, even if all disposable income is spent on consumption, amounts to at most 7.2% of pre-tax income.[1] Moreover, since it is reasonable to assume that some money will be saved, the consumption tax burden rate relative to pre-tax income decreases further as the savings rate increases. By contrast, social insurance premiums are already deducted at the source, and no matter what one does, the household burden cannot be reduced.
Additionally, reflecting on the 2024 fixed-amount tax reduction after solving the math problem above, we can see that cutting the consumption tax will not save household budgets. Some readers may have even forgotten that there was a fixed-amount tax reduction in 2024, and we hardly hear any positive feedback from citizens saying the benefits were substantial.
The 2024 fixed-amount tax reduction for income tax and individual resident tax was 40,000 yen per person. Since it is a fixed-amount reduction, it is difficult to express as a percentage, but for a household with an annual income of 4 million yen bearing a 5% burden in income tax and individual resident tax, the total burden would be 200,000 yen. For a family of four, the total reduction would be 160,000 yen. Converting this to a burden rate, it is 160,000 yen compared to 4 million yen, which equals 4%.
Since this fixed-amount tax reduction has been all but forgotten, and we hear virtually no positive feedback about it, implementing a consumption tax cut that provides a similar level of burden relief could not possibly result in winning public approval afterward.
What would a consumption tax cut equivalent to the 2024 fixed-amount tax reduction look like? Using the above problem, it would be either the consumption tax burden in Question 2, when the consumption tax rate is halved (reducing the consumption tax rate from 10% to 5%, etc.), or the consumption tax burden in Question 3, when the consumption tax is completely abolished. For households that save very little, even halving the consumption tax rate would only provide burden relief equivalent to the 2024 fixed-amount tax reduction.
The heavy burden comes not from the consumption tax, but from social insurance premiums. We must not misjudge this fundamental reality. Household budgets can be saved by achieving truly meaningful reductions in the social insurance premium burden.
Let us now examine the household burden structure based on more rigorous data. There are virtually no official government statistics that comprehensively present the burden of income tax and individual resident tax, the burden of social insurance premiums, and the burden of consumption tax all together. The consumption tax burden must be estimated based on household consumption patterns.
For this reason, I used the Japan Household Panel Survey (JHPS), which can analyze the structure of household income and consumption in 2019—the most recent data unaffected by the COVID-19 pandemic—to analyze the burden structure of income tax and individual resident tax, social insurance premiums, and consumption tax. The JHPS is conducted by the Panel Data Research Center at the Institute for Economic Studies, Faculty of Economics, Keio University. Table 1 shows the burden structure divided into income quintiles.
Table 1: Annual Burden of Income Tax, Individual Resident Tax, Social Insurance Premiums, and Consumption Tax by Income Class
|
Income Quintile |
Annual |
Income Tax/Resident Tax |
Social Insurance Premiums |
Consumption Tax |
|||||
|
Household Income |
|
Income Tax |
Resident Tax |
|
Pension |
Medical |
Long-term Care |
||
|
I (Bottom 20%) |
Up to 440 |
7.4 |
2.0 |
5.4 |
40.4 |
25.7 |
13.3 |
1.4 |
14.7 |
|
II |
441 - 600 |
21.8 |
6.7 |
15.1 |
67.0 |
42.5 |
22.3 |
2.2 |
19.1 |
|
III |
601 - 755 |
37.6 |
13.0 |
24.6 |
90.1 |
57.0 |
29.8 |
3.3 |
22.2 |
|
IV |
756 - 993 |
61.1 |
24.8 |
36.3 |
117.2 |
74.0 |
38.6 |
4.6 |
26.2 |
|
V (Top 20%) |
994 and above |
147.3 |
78.7 |
68.6 |
180.6 |
113.8 |
59.1 |
7.7 |
34.1 |
Unit: 10,000s of yen
Sources: Ministry of Internal Affairs and Communications, “2019 National Survey of Family Income, Consumption and Wealth”; Takero Doi (2020), “The Impact of Population Decline on Social Security Financing,” Chapter 8 in Report from the Study Group on Population Decline and Economic Growth. https://www.mof.go.jp/pri/research/conference/fy2019/jinkou_report08.pdf
Produced by the author
Table 2 shows the burden rates relative to pre-tax income based on Table 1.
Table 2: Burden Rates of Income Tax, Individual Resident Tax, Social Insurance Premiums, and Consumption Tax by Income Class
|
Income Quintile |
Average |
Income Tax/Resident Tax |
Social Insurance Premiums |
Consumption Tax |
|||||
|
Income (10,000s of yen) |
|
Income Tax |
Resident Tax |
|
Pension |
Medical |
Long-term Care |
||
|
I (Bottom 20%) |
320.5 |
2.3 |
0.6 |
1.7 |
12.6 |
8.0 |
4.1 |
0.4 |
4.6 |
|
II |
518.4 |
4.2 |
1.3 |
2.9 |
12.9 |
8.2 |
4.3 |
0.4 |
3.7 |
|
III |
671.2 |
5.6 |
1.9 |
3.7 |
13.4 |
8.5 |
4.4 |
0.5 |
3.3 |
|
IV |
861.5 |
7.1 |
2.9 |
4.2 |
13.6 |
8.6 |
4.5 |
0.5 |
3.0 |
|
V (Top 20%) |
1318.6 |
11.2 |
6.0 |
5.2 |
13.7 |
8.6 |
4.5 |
0.6 |
2.6 |
Unit: %
Source: Produced by the author
The math problem presented earlier was crafted to make a point, but it closely approximates the data shown in Table 2. Since income tax is progressive, higher-income groups face higher tax rates. While the consumption tax appears regressive at first glance, this is because savings rates are higher among high-income earners. As shown in Question 4 of the math problem, even with the same income, a higher savings rate results in a lower consumption tax burden rate.
Looking at Table 2, the social insurance premium burden rate is higher than the consumption tax burden rate across all income groups. The problem presented earlier is not fiction, but rather depicts the objective reality.
Indeed, the government is seriously examining measures to reduce the social insurance premium burden on the working-age population. However, since these measures will not be effective unless implemented alongside reforms to social security benefits, citizens unfamiliar with the social security system may find it difficult to perceive tangible progress in discussions regarding reduction of the burden.
That being said, cutting the consumption tax will not solve the problems related to household burdens. Rather than diverting attention from the fundamental issue through consumption tax cuts, we need policy discussions that directly address the structure of the burden created by social insurance premiums.
[1] In the above problem, for simplification, we set this to 9% of consumption expenditure, but this can be said to reflect reality as well. When the consumption tax rate is 10%, if the tax-inclusive price of a product is 110 yen, the tax-exclusive price is 100 yen (110 ÷ (1 + 0.1)). Therefore, if the tax-inclusive price of a product is 100 yen, the tax-exclusive price is 100 ÷ (1 + 0.1) = approximately 90.9 yen, and the consumption tax is approximately 9.1 yen. Thus, approximately 9% of consumption expenditure goes to consumption tax. Of course, Japan’s reduced tax rate is 8%, and when this is included, the actual consumption tax burden rate is even lower.
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- RESEARCH DIRECTOR(–FY2024)
- Takero Doi
- Takero Doi
- Areas of Expertise
-
- Public economics
- fiscal policy
- taxation
- social security
- income distribution
-
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