Upper House election issue: Would reducing the consumption tax really favor the wealthy?

The 2025 House of Councillors election is focused on tax cuts and benefits.

The crucial 2025 House of Councillors election that will determine the course of our future has begun. Because there is real suspense over whether the ruling bloc will lose its majority, the race is already heating up.

Ministry of Internal Affairs and Communications

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A variety of policies are being debated, but—as always—the spotlight is on taxes. This time, calls for “cutting or even abolishing the consumption tax” are louder than ever.

Given the recent record-breaking surge in prices, it is only natural for ordinary people in Japan to want to lighten their daily burden even a little. Many surely feel this acutely whenever they check price tags on food.

Statistics Bureau Home Page / Consumer Price Index (CPI) Nationwide (Overview of the Latest Monthly Results)

Even so, we must think carefully about whether tax cuts or cash handouts are really the right answer. I am also concerned about the macro perspective of national finances.

In corporate-management terms, Japan’s public finances are in a crisis.

The media have repeatedly reported that Japan has long run a primary-balance deficit and has an enormous outstanding stock of government bonds.

Ministry of Finance

Fiscal Pamphlets & Educational Materials: Ministry of Finance

In company terms, it is like continuing to post operating losses while borrowing more from the bank every year. Common sense tells us the bank will eventually stop lending, and interest rates will inevitably rise.

The same applies at the national level: if no one buys the government bonds the state issues, interest rates must go up. Government bonds and corporate loans differ, of course, but the basic logic is the same.

Against that backdrop, is it really wise in the long run to tamper with the consumption tax, a stable revenue source that underpins national finances? We need to look beyond short-term gains and consider whether the burden will return—perhaps to future generations, or even to ourselves in the near future.

Viewing the current debate from that angle, I came across a very intriguing argument.

Is it really true that “cutting the consumption tax would favor high-income earners”?

Until now, cutting the consumption tax had never been seriously entertained, but the ruling bloc’s recent loss of its Lower House majority has made the idea plausible—and suddenly discussable. Up to now, the consumption tax has been labeled“a regressive tax that burdens low-income earners more heavily and favors the wealthy,”and that has been the standard criticism. Yet now we hear that“a tax cut favors high-income earners,”which strikes me as quite a novel claim.

At first glance this seems contradictory and a bit confusing. Why do two seemingly opposite arguments coexist? I would like to unpack their structure and sort out my own thoughts.

The conventional wisdom of “regressivity”

First, let us confirm the basis of the idea—shared by most of us—that“although the consumption-tax rate is uniform and looks fair, it actually places a heavier burden on low-income households.”This perception stems from a feature of the consumption tax known as “regressivity.”

Simply put,“the lower a person’s income, the higher the percentage of that income that goes to tax.”That is the phenomenon.

The reason is that the share of income devoted to consumption—the propensity to consume—tends to be higher among low-income households. Wealthier households can divert part of their income to savings or investment, whereas poorer households must spend most of it on daily living expenses—i.e., consumption. Thus the consumption tax hits the poor harder and the rich more lightly.

Let me illustrate with an ultra-simplified example.

Suppose a household earning ¥3 million a year spends ¥2.5 million, and a household earning ¥20 million spends ¥10 million. At a 10 % consumption-tax rate, the tax burden as a share of income is:

• Household earning ¥3 million: ¥250,000 tax ÷ ¥3 million income = 8.3 % burden
• Household earning ¥20 million: ¥1 million tax ÷ ¥20 million income = 5.0 % burden

Although the higher-income household pays more tax in absolute terms, the burden as a percentage of income is heavier for the low-income household. This is the essence of the consumption tax’s regressivity. To mitigate it, the current 8 % reduced rate on food and certain other items was introduced.

Reduced Consumption Tax Rate System | National Tax Agency

The scheme is somewhat complicated, but it should offer a certain degree of relief.

A new perspective: “Tax cuts themselves favor the wealthy”

So what is the logic behind the counter-argument that “cutting the consumption tax actually favors high-income earners”? We were told repeatedly that introducing or raising the tax favored the rich, so saying that lowering the rate does the same seems contradictory.

The answer emerges when we shift perspective and look at the absolute amount of benefit each person receives from the cut—who gains how much.

Using the same example, let’s calculate how much tax each household would no longer have to pay—that is, the benefit—if the consumption-tax rate were lowered from 10 % to 5 %.

• Household spending ¥500,000 a year: benefit from the tax cut = ¥2.5 million × 5 % = ¥125,000
• A household that spends ¥10,000,000 per year: the benefit from the tax cut would be ¥10,000,000 × 5% = ¥500,000

As these figures show, the increase in disposable income from the tax cut is far greater for high-income households with larger spending. If the rate were reduced to 0%, the gap would widen further to ¥250,000 versus ¥1,000,000.

From this, the key points of the two seemingly contradictory arguments are as follows.

1. If you focus on the “ratio” of the burden, the consumption tax is regressive.
2. If you focus on the “amount” of benefit from a tax cut, the cut works to the advantage of higher-income groups.

Neither claim is outright false; they simply view the issue from different angles. This helps explain why debates over the consumption tax are so complex and sometimes appear twisted. When politicians discuss the tax, they present different takes on the same facts to suit their positions. By paying attention to who makes which claim and what that politician or party aims to achieve, you can gain deeper insight.

Take another close look at the chart, focusing on the purple segment of the pie graph. From that “ratio,” you can see that the tax-cut “rate” for a household earning ¥20 million a year is actually small.

The sobering reality of losing our “largest single revenue source”

Some may argue that whether you look at the benefit rate or the benefit amount, everyone’s burden gets a little lighter, so a tax cut is fine. For people suffering from declining real wages—where pay isn’t keeping up with price hikes—the desire to lower prices by any means is understandable. Indeed, if the consumption-tax rate were cut from 10% to 5%, consumer prices would effectively fall by 5%, an improvement over roughly 2% inflation.

However, a very practical issue arises: how to replace the lost revenue. Government figures show that in FY2024 the consumption tax will be the largest source of national tax income—about ¥23.8 trillion. Surpassing income and corporate taxes, it is literally the backbone of Japan’s finances. For a company, this would be akin to a massive drop in sales.

If the rate were halved to 5%, roughly ¥12 trillion a year—an amount on the scale of a national budget—would disappear. Some claim lower prices would spur consumption, boost the economy, and raise tax revenues, but in reality people are unlikely to buy extra goods; they would merely find it easier to purchase rising-price necessities.

For that reason, I do not accept the view that economic growth from a consumption-tax cut or abolition could offset the lost revenue. As noted earlier, Japan’s finances are already in deficit and cannot survive with reduced consumption-tax income.

In practice, only a few options exist to fill a revenue gap of this size.

• Issue more government bonds (pushing the burden onto future generations)
• Raise other taxes such as income or corporate tax (you still pay tax—just in a different form)
• Drastically cut social security and other public services (the tax cut meant to help struggling households could hurt them through poorer services)

Clearly, piling on more debt is not an option. The other choices also inflict pain and greatly affect our lives. If income tax rises, disposable income falls, so even if consumption tax drops, your take-home pay is smaller to begin with.

Personally, I think raising corporate taxes—especially on large firms—could help, but that alone cannot cover the lost consumption-tax revenue. Taxes tied to corporate earnings also make stable budgeting difficult. By law, consumption-tax revenues are earmarked for social security benefits such as pensions, healthcare, nursing care, and child-rearing. A quick-fix tax cut could weaken the very safety net we rely on.

Judging from Nikkei articles and other news sites I read, consumption-tax cuts and cash handouts do not seem to enjoy much public support.

People appear to grasp the obvious: they won’t trade a small, immediate gain for a larger, long-term loss.

Final thoughts

This time, I dug a bit deeper into the consumption-tax issue—an election topic—starting from the question of why claims of favoritism toward the rich arise both when the tax is raised and when it is cut.

Words like “tax cut” and “cash handout” always sound attractive, but we must calmly weigh their many ramifications—who benefits most and what we might lose in return.

I know almost no one who says voting changes nothing; I believe a clear expression of will can change politics. In fact, the ruling coalition’s loss of its lower-house majority is already altering many things and giving opposition policies more weight. Now we must judge each party’s platform, including whether it is willing to prescribe painful remedies, not just offer appealing promises.

★

I set out to explore the paradox that criticism remains the same even though opposite effects occur when the consumption tax is raised or cut. Once I started researching, I realized I needed to explain the background too, and the article became long. That always seems to happen—I guess it’s just a habit of mine.