Refundable Tax Credit Reduced to a Refund

It is usual for political agenda of the top leader to be diminished in the process of implementation. One of the most prioritized policies to support low-income families by Prime Minister Sanae Takaichi, refundable tax credit, is going to be degraded into a temporary relief of refunding. The consultative conference of Takaichi seems to have concluded that tax credit was too complicated to introduce as an achievement of Takaichi’s tax and social security reform. 

Takaichi proposed two-year moratorium of consumption tax on foods and introduction of refundable tax credit thereafter as her campaign policy as the president of Liberal Democratic Party in February election of the Lower House. Following the election, she launched National Council on Social Security to implement her policy. The council has been discussing how the system of refundable tax credit should be look like.

 

In the meeting on May 20^th, the government of Japan, mainly led by Ministry of Finance (MOF), presented a draft of refundable tax credit. It was in fact introducing refund of subsidy for low-income families and no architecture of tax credit. “For sophisticated support depending on the amount of income of each family, the system should be integrated into a benefit,” said the draft.

 

Refundable tax credit is a system in which payment of tax is reduced and the government provide funds for the family that cannot receive full benefit of the tax credit. One thing clear is that refundable tax credit will reduce revenue of national budget, of which MOF is most afraid. While refundable tax cut should be a permanent system, provision of fund can be temporary support for families.

 

According to the draft, the refunding for tax payers will be made in four stages. To the families with lowest income, which are exempted from paying resident tax, the government provides the same amount of money for each family. To others a little beyond the threshold of paying resident tax, refund from the government increases as the income rises. The reason why the refund increases dependent on amount of income is to encourage working. Some workers quit their working when their income reaches the threshold of tax exemption.

 

To families with higher income, the government prepares refund with a flat amount for each. And as the income further increases, the provision will gradually be reduced. The government will not provide any refund of tax for families with large amount of income. There is a discussion that the government needs to offer greater refund for the families with little children, and that elder people who can receive other governmental support should not receive that refund.

 

The discussion for permanent refundable tax credit is replaced with temporary subsidy for low-income families. The government argues that refundable tax credit is too complicated to introduce within a certain period of time. Local governments will need to grab which family can receive which amount of refund. Employers will be forced to identify which employee should be in which category of annual income.

 

Supposedly, a true reason of abandoning tax credit is lack of fiscal resource. If the government introduces that system, it needs to find another budget which will annually be several trillion yen. Takaichi administration has not found financial recourse for accumulation of defense budget or two-year moratorium of consumption tax for foods. A promise of the prime minister in an election may not be implemented.