Targeted Support vs. Reduced VAT: Rethinking Equity in Consumption Tax Policy

Effective Date: May 12, 2025

Type: Legislation

A study by Fei Gao at Waseda University analyzes Japan’s 2019 tax reform, which introduced a reduced 8% VAT on food to support low-income households. While the policy offers some redistribution, it only partially offsets the regressive nature of consumption taxes. Gao argues that a better approach would be a small net subsidy on essentials, combined with higher taxes on non-essentials, to improve welfare outcomes. Supporting evidence from European countries shows that reduced VAT rates on necessities still result in regressive tax effects. Overall, direct subsidies or targeted welfare transfers may be more effective than reduced VAT rates in achieving social equity.

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