Visible Taxes, Invisible Taxes

2019/06/24

Do you know what an "implicit tax" is? The consumption tax is scheduled to rise to 10% starting October 1, 2019, and a phenomenon known as "last-minute demand" always occurs during tax hikes. Since consumers are forced to bear an additional tax burden just by shifting their purchase by a single day, this behavior itself seems rational. In particular, the larger the purchase price—such as for housing or automobiles—the greater the impact of the tax increase, and thus the greater the last-minute demand will be.

Now, consider the backlash of last-minute demand after the tax increase. What would a retailer with fewer customers think? They would likely try to sell their products even if they have to lower the price. In other words, buying items before a tax hike does not necessarily mean you can purchase them at a lower price. This change in pre-tax prices before and after a tax increase is brought about precisely by the consumption tax hike, so it is called an "implicit tax." In short, an implicit tax arises when "pre-tax prices, which are not directly related to taxes, are distorted by the existence of taxes." The important point in this example is that while consumers react strongly to "visible" price changes like tax hikes, they have little interest in changes to pre-tax prices.

There is an interesting study from overseas. In the United States, retail taxes are introduced at the state level. When American researchers investigated whether consumer behavior differs depending on whether the price displayed at the supermarket includes or excludes tax, they found that sales of products with tax-inclusive prices were, on average, about 8% lower than those with tax-exclusive prices. This 8% is roughly equivalent to the retail tax rate. In other words, consumers were thought to have behaved irrationally by focusing on the price tag (displayed price), even though they knew the tax would be added at the register.

Currently, in Japan, while the general rule for transaction prices of taxable businesses is to display tax-inclusive prices, tax-exclusive pricing is also permitted as an exception. In fact, many retailers adopt tax-exclusive pricing. Since the consumption tax became 8%, haven't you ever noticed at the checkout counter and thought, "Did I really buy something that expensive?" Retailers likely understand empirically that displaying prices as tax-inclusive or tax-exclusive affects sales, which is why they actively choose to display tax-exclusive prices.

After the tax increase in October, I recommend carefully observing whether the price on the tag is tax-inclusive or tax-exclusive when shopping.