Annual Tax Reform Is Concluded

The Liberal Democratic Party (LDP) and Japan Innovation Party (JIP) agreed on their tax reform proposal for FY2026. To attract the Democratic Party for the People (DPP), the leading parties not only raised threshold of income tax from 1.60 million yen of annual income to 1.78 million yen, but abolished automobile tax on purchasing a new car. The decision seems more to be implementing political agenda, than fixing problems in financial system of the government. 

Raising threshold of income tax has been requested by the DPP for a year. “Increasing take-home pay” was a main slogan of the DPP in the Upper House election in July. The fact that the LDP had not implemented the promise to raise the threshold was the reason why the DPP did not accept an offer from LDP president Sanae Takaichi to form a coalition in October.

 

The LDP’s answer to DPP’s request had been that raising the threshold would be unreasonable in terms of reforming tax system. Takaichi dealt with the protest of LDP experts on tax system through appointment. As soon as she took office of LDP president, Takaichi replaced the chairman of LDP Research Commission on the Tax System, Yoichi Miyazawa, to Itsunori Onodera.

 

The tax commission of the LDP has been exercising its independent power on deciding tax reform and Miyazawa, a former officer of Ministry of Finance (MOF), represented interest of MOF. Takaichi changed the leader of the commission to push her policy. It is likely that new prime minister reformed decision-making system on tax by appointing Onodera who does not have any experience as an expert on tax reform.

 

A tax has been imposed on buyer of new car, according to its performance for environment. While the DPP has been demanding to reduce the tax, Takaichi decided to abolish the tax to make consumers easy to buy a car. It is notable that the DPP is basically supported by workers’ union of car manufacturers. It is Takaichi’s political decision to get support of the DPP on main budget bill for FY2026 in the ordinary session of the Diet next year.

 

Takaichi has accumulated defense budget to the level of 2 percent of Japan’s GDP in FY2025 supplemental budget, which passed the Diet in this month. However, it still is unclear how the government finds fiscal resource for it. Although the government has decided to raise corporate tax and tobacco tax for defense spendings from FY2026, it was not determined when income tax would be raised. The LDP and JIP agreed on that income tax will be increased from FY2027.

 

The main purpose of tax reform by Takaichi is to attract the DPP to recover minority government in the Upper House. In the meeting with Takaichi, DPP’s leader, Yuichiro Tamaki, offered further cooperation with the LDP. There is a speculation that the DPP may consider joining the leading coalition with the LDP and JIP to implement its own policies.

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