Economic Package: Will Income Tax Cut Turn the Economy Around?

Editorial

15:42 JST, November 3, 2023

Prime Minister Fumio Kishida emphasized that the government aims to realize a virtuous cycle of wage hikes and economic growth, but it is difficult to clearly see how its economic measures — which will involve massive spending — will turn around the economy and people’s lives.

At a Cabinet meeting, the government has decided on economic measures to deal with high prices and other issues. The main pillars of these measures are fixed-amount tax cuts that deduct a certain amount from income and residential taxes, and a provision of cash benefits for low-income households. Also, a subsidy program to hold down gasoline prices will be extended until the end of April next year.

The scale of the economic package will be in the lower ¥17 trillion range, and the total amount of the supplementary budget proposal for fiscal 2023, which will support the economic package, is estimated to total ¥13.1 trillion.

Since the coronavirus pandemic, the compilation of huge supplementary budgets has become the norm, with a total of ¥31.6 trillion appropriated for fiscal 2022. Although the scale of this year’s supplementary budget has been reduced, it is still significantly larger than the ¥3.2 trillion for fiscal 2019.

Moreover, as with measures against the novel coronavirus, deficit-covering government bonds will be used to finance the supplementary budget this time as well, according to the government. Can it really be called appropriate to finance such pork-barreling measures as cash benefit provisions with debt, passing the burden of that debt along to future generations?

The fixed-amount tax cuts will be ¥40,000 per person and the total amount will be calculated in consideration of dependents. For example, a family of four with two children would receive a total tax reduction of ¥160,000.

Since the tax cuts do not benefit low-income earners who do not pay taxes, a benefit of ¥70,000 per household will be distributed to households that are exempt from residential taxation.

The per capita tax cuts, which include an amount for dependents, and the benefits per household, could create a sense of inequality based on family size.

In addition, the system could become complicated because the government intends to take compensatory steps for those who cannot receive sufficient tax reductions due to low tax payments, and for households who pay only the residential tax and thus cannot receive the benefits. If there is confusion over the payment of benefits, it could undermine the effectiveness of the economic measures.

Kishida has expressed his intention to return to the public part of recent growth in tax revenues from income and individual residential taxes for the past two years. He stressed that tax cuts are “absolutely necessary to completely overcome deflation.”

Kishida envisions that by simultaneously implementing the tax cuts in June, when next year’s wage hikes will actually be reflected in salaries, the public will be able to actually feel an increase in their incomes, thereby ensuring the end of deflation.

However, the tax cuts are expected to be limited to one time, around June next year. It is not certain whether this alone will be able to reverse the deflation that has persisted for many years. It is essential to thoroughly examine the effectiveness of the tax cuts, which have been opposed by some of the public and lawmakers in the ruling Liberal Democratic Party.

What is important in overcoming deflation is the continuation of wage hikes that outpace price increases, rather than tax cuts for which the basis is unclear.

(From The Yomiuri Shimbun, Nov. 3, 2023)