A Sober Younger Generation Gives Japan a Hangover: Gearoid Reidy

The Machiavellian ruler in Terry Pratchett’s Discworld novels, Lord Vetinari, once compared taxation to dairy farming. “The task,” he said, “is to extract the maximum amount of milk with the minimum of moo.”

Japan’s tax agency is learning this lesson the hard way. It’s found itself with an unexpectedly large amount of moo after a seemingly innocent campaign to support local industry went viral. The problem was that the sector in question was the alcohol business; the agency is soliciting open-ended ideas from young people for ways to help revitalize the nation’s liquor trade, amid a decline in drinking among younger people.

Tax revenue from alcohol has been falling for years in Japan as the population ages and a younger generation, fewer in number, shies away from the hard-drinking habits of the past, like once-obligatory post-work binges. That’s bad news not just for Japan’s tax coffers, but also listed makers of beers and spirits, the 1,400 sake breweries and hundreds of other makers of shochu, whisky, craft beer and gin.

Little did agency bureaucrats suspect that their campaign would end up making international headlines after the story surfaced first on domestic social media. It quickly became one of the rare moments when foreign media gets interested in the world’s third-largest economy. “Japan urges its young people to drink more to boost economy” was one typical headline.

Of course, the ad says precisely nothing about boosting the economy, nor does it encourage binge drinking. Japan’s economy is in need of a boost, though. The country’s recovery from the pandemic has been slower than peers, with gross domestic product only climbing back to pre-Covid levels in the quarter ended June, a year after the US. The liquor tax contributes almost 2% of Japan’s total tax revenue; one estimate puts the size of the industry at nearly $25 billion.

Japan has, however, been seeing a rise in the “sober curious” — some 40% of men in their 30s said in 2017 that they don’t, can’t or hardly ever drink alcohol, up from 28% 10 years earlier, according to NLI Research Institute. The figure rose for women to 65% from 54%, and the same trend is reflected in other age groups. Japan’s income from liquor tax is down nearly 50% from a peak in 1994.

With alcohol carrying both potential benefits and risks, the objections seem to boil down to this: Should an arm of the government be encouraging people to drink, even in moderation? That’s certainly up for debate. But Japan’s tax agency is hardly alone here in explicitly or otherwise encouraging a tipple. Kentucky offers tax credits to its booming bourbon industry and is discussing going further still with tax cuts. French President Emmanuel Macron is a strong defender of drinking two glasses of wine a day and is reported to have opposed a “Dry January” program. That’s modeled on a month of abstinence in the UK — where at the same time, the government has been slapping itself on the back over its funding of pubs in rural areas. That, the government says, helped save pubs from closing in a “boost for Great British boozers .”

One irony here is that if tax coffers are suffering due to young people turning away from booze, much of that blame can be put on the Japanese government itself. For nearly half of 2021, the government asked bars and restaurants not to serve alcohol as part of attempts to reduce Covid infections — and rather than push people into outdoor venues where risk was lower, discouraged young people from drinking in parks or on the street.

As with many a Covid-era policy, the knock-on effects of an overhanded crackdown on alcohol are being felt, even if Japan is gradually loosening its stance towards the virus amid a lower case fatality rate than previous waves. The number of izakaya pub-styled restaurants run by the largest 15 firms has dropped 23% since before the pandemic, according to Tokyo Shoko Research. Many workplaces still discourage employees from gathering to drink together; others continue to voluntarily shy away from socializing even in the absence of government pressure to do so. This week, one local newspaper summed up the abstemious attitude when it seemed to suggest that Prime Minister Fumio Kishida’s recent Covid infection was due to dining out and taking vacations, unlike his predecessor.

Tax revenue as a percentage of GDP stands at just 19%, according to the Finance Ministry, versus the 33% in Sweden or 47% in Denmark. Meanwhile Japan spends like it’s taking in the revenue of a Scandinavian nation; social security payments and repayment of debt amount for fully half of its budget. Having closely moved in lockstep with spending for years, tax revenue is largely flat since 1990, while spending has continued to surge — a worrisome formation often referred to here as the “crocodile’s mouth.” That situation has only worsened during the pandemic, and is unlikely to improve as the working-age population grows older.

Japan has had trouble introducing new tax revenue streams. Debates over raising the sales tax, something other countries do overnight, used up much of the political oxygen for the past decade; it continues to be debated to this day with periodic calls to lower it. Other revenue sources are also falling, with tobacco tax dropping along with the fee levied on international tourists, another consequence of government policy. Gasoline tax, which makes up over 3% of tax revenue, is unlikely to increase in future years as the country eyes a carbon-neutral future.

In other words, Japan is spending more than it can afford, so forgive the tax office for searching for solutions. Is that so different from the increase in US states legalizing marijuana — which has generated more than $11 billion in tax revenue from 2014 to 2021, according to one estimate? Ultimately, somebody has to supply the milkman.

More From Bloomberg Opinion:

• Japan Shouldn’t Raise Taxes on Retail Investors: Gearoid Reidy

• The IRS Has Problems That $80 Billion Won’t Solve: Tyler Cowen

• At 5 Years, India’s Tax Reform Is Out of Fuel: Andy Mukherjee

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To contact the author of this story:
Gearoid Reidy at greidy1@bloomberg.net

To contact the editor responsible for this story:
Ruth Pollard at rpollard2@bloomberg.net

1. A note to US readers: “boozer” here means the pub rather than someone who drinks in one -- though the sentence does work either way.
   

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