Tax Increase for Defense Partly Postponed

The Liberal Democratic Party (LDP) decided not to specify when the government begins to increase income tax to appropriate upsurge in defense budget. Although the ruling party hoped to determine that the income tax increase for defense would be started in FY 2026, it realized that the plan might offset its policy for expanding income tax credit, which was requested by the Democratic Party for the People (DPP). Having lost majority in one of the Houses in the Diet, the LDP does not have clear vision to implement its policy of increasing defense budget.

Former Prime Minister Fumio Kishida decided to secure 43 trillion yen for defense in five years between FY 2023 and FY 2027. To appropriate that budget, 14.6 trillion yen is needed to add current level of defense budget. Kishida found some resources for the budget, which included reform of expenditures, appropriating surplus in account settlement and special accumulation of funds for defense.

 

Tax increase is another resource for the rising defense budget, which amount was supposed to be 1 trillion yen in FY 2027. It will be compensated by corporate tax, tobacco tax and income tax. Kishida determined that the tax increase would be starting in 2024 or later. However, it was not included in the tax reform for FY 2024.

 

In the discussion of tax experts of the LDP and Komeito, they agreed on creating special corporate tax for defense and introducing higher tax rate for cigarettes in FY 2026. However, the LDP gave up its idea to start special income tax for defense in January 2027, receiving skepticism on it from its coalition partner, Komeito. The LDP was planning to compensate increase of income tax for defense with reduction of special income tax for reconstruction from the East Japan Great Earthquake in 2011.

 

Main reason was negotiation over income tax with the DPP. The LDP and Komeito agreed with the DPP to raise threshold of imposing income tax from 1.03 million yen of annual income. In current taxation system, a household with annual income less than 1.03 million yen would not pay income tax. The agreement aims at raising the line to 1.78 million yen to increase households that are evaded from the payment.

 

Raising of the threshold effectively means tax reduction. Income tax increase for defense may contradict to the policy directed to ease tax payment of households. Worried about declining public support caused by coalition with unpopular LDP, Komeito proposed not to determine the time when the tax increase for defense budget would be started.

 

Prime Minister Shigeru Ishiba is facing difficulty in implementing Kishida’s defense enhancement. Cost of procurement of defense equipment is uprising with depreciated Japanese yen in foreign exchange. Incoming Donald Trump administration of the United States is expecting Japan to accumulate defense budget to decrease the burden of the U.S. Ishiba hopes to improve treatment of members of Self-defense Forces of Japan, including wage hike for them. Enhancing defense capability requires political stability of leading parties.

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