Unpopular Tax Cut

Prime Minister Fumio Kishida on Friday directed the leading coalition parties, Liberal Democratic Party and Komeito, to consider introducing income tax reduction as a measure to deal with current inflation. Easier said than done. Kishida did not instructed how to do that exactly. Raised were a lot of reasons about the difficulty from his colleagues in LDP. His political intention of taking advantage of tax cut for his administration is too obvious for the people to believe in his handling of economy. It is unclear that the decision will bring preferable outcome. 

In the press conference on new economic stimulus plan on September 25^th, Kishida told that he would return the achievement of economic growth to the people. It was recognized as his announcement of introducing new tax reduction.

 

When he decided to increase the defense budget last December, Kishida thought that tax increase would be inevitable to squeeze the budgetary resource out. LDP tax policy research board in June released some details of possible tax increase, which included taxation on the workers’ expense on daily commuting or reviewing taxation on retirement allowance. Polls showed unpopularity on tax increase for defense budget and Kishida is dubbed as “tax hike with glasses.”

 

Kishida asked the policy board members of the leading parties to seek the way to introduce income tax reduction and distribution of the benefit to the low-income families. There are two ways of income tax reduction: uniform and proportionate. Uniform tax reduction is of the same amount of tax cut for each family, which benefit is greater for low-income family than for the highs. The amount of tax cut varies depending on the amount of income of the family in proportionate tax reduction. Kishida is supposed to choose uniform type of tax reduction.

 

The head of LDP Tax Policy Research Council Yoichi Miyazawa, a cousin of Kishida, told the reporters that the tax cut would be temporary with the length of a year. The chairman of LDP Policy Research Council Koichi Hagiuda was negative on the tax increase next year, because tax cut and tax hike were incompatible.

 

Kishida expects the tax cut will be included in the economic policy package announced in early November and it will be discussed in the ordinary session of the Diet next year. The actual delivery of the tax cut policy will be as late as next April or later. Even the policy is introduced, some low-income families, which pay no income tax, cannot receive the merit of tax cut. The benefit for them is also considered by the leading parties. But the government has already introduced the benefit for gasoline, electricity or gas and it will be extended to next year. The biggest question for the policy makers is whether they can find the budgetary resource for it.

 

LDP administration has once introduced uniform type of tax reduction at the time of PM Ryutaro Hashimoto in 1997. The policy brought the shortage of tax revenue and next administration led by Keizo Obuchi changed it into proportionate type. The political impact of tax cut is always big.

 

Kishida’s announcement of tax cut this time was made just before the day of by-elections in both Houses of the Diet this weekend. Although Kishida joined the campaign trails of LDP candidates last weekend, their public support has not shown obvious boost. If LDP loses in both of the elections despite of populistic tax cut decision, the fate of Kishida administration will be further unpredictable.