Tax Reform with Political Motivation

The Liberal Democratic Party and Komeito on Thursday agreed on the tax reform for FY 2024. To implement Prime Minister Fumio Kishida’s request of comprehensive tax cut to return the surplus of tax revenue to the taxpayers in October, the leading coalition decided to accumulate ¥3.5 trillion for it. The package is aimed to support other important policies of Kishida administration, including the measures dealing with low birth rate and wage increase, in the middle of money scandals which is significantly eroding political basis of Kishida.

For the comprehensive tax cut starting June 2024, the coalition requested the government to introduce ¥30 thousand reduction of income tax for a person and ¥10 thousand of resident tax. For a family with four people, it means ¥160 thousand of tax reduction. The high-income taxpayers over annual ¥20 million will be excluded from the recipients of the tax cut.

 

Kishida is enhancing support for the families with children for his policy goal to raise birthrate. The upper limit of the balance of housing loans for tax easing will be lifted for the families with children or young couples. If a family reforms their house for raising kids, the government will reduce their income tax. If a family has a child younger than 23, their payment for life insurance will be eased.

 

The measures for wage hike will be exercised through corporate taxation policy. If a major corporation raises the wage by 7% or more, the corporate will receive 35% of tax deduction in maximum. If a small or medium sized business with wage hike suffers from deficit, it will be filed as being able to receive the moratorium of corporate tax for five years in maximum.

 

For the incentives for domestic investment, it will introduce new system of reducing corporate tax for electric vehicle, semi-conductor or sustainable aviation fuel. To prevent outgoing of technology, new taxation called “innovation box” will support intangible assets such as patent or copyright of software.

 

The leading coalition did not determine when the government should introduce tax increase for defense budget. The tax increase has been supposed to be made with surplus in the taxes of corporate, income and cigarette. While the tax research councils of LDP and Komeito wanted to decide it within this year, Kishida’s sudden announcement of tax reduction and public criticisms on LDP money scandal made it difficult.

 

The former administrations introduced reduction of corporate tax to support economic growth strategy, which has necessarily not produced enough economic outcome. The package for FY2024 described that there may be the discussion for increasing corporate tax in the future. The parties need to discuss how to reduce accumulated fiscal deficit, the issue which the government has been reluctant to tackle on.