Can tax reform lead to realizing Kishida’s wealth-distribution goal?

Can tax reform serve as a foothold toward realizing the “virtuous cycle of growth and distribution” advocated by Prime Minister Fumio Kishida? It is hoped it will have the effect of bringing about a more proactive stance from companies.

The Liberal Democratic Party and its ruling coalition partner Komeito have decided on the framework for tax reform in fiscal 2022. To give shape to the distribution aspect, one of its main pillars is a measure to greatly expand tax breaks for companies to encourage them to raise wages.

According to the framework, small and midsize enterprises that raise their total payroll and upgrade employee training programs will qualify for a corporate tax deduction of up to 40% of the increase, while big firms that do likewise will get a deduction of up to 30%. Payroll amounts will include not just basic wages, but also bonuses.

This would be a major expansion of the deduction, which is currently capped at 25% for small and midsize enterprises and 20% for large firms.

The government introduced the tax break in fiscal 2013 to encourage companies to raise wages, in the belief that stagnant pay had been hindering economic recovery. However, even though the government has continued the system while occasionally tweaking the criteria, it has not produced substantial results.

One reason cited in the framework is the excessive focus by companies on cutting costs and prices to remain competitive. This is a valid view of the issue.

In the latest framework, firms reluctant to raise wages and make capital investments despite strong business performance will not be eligible for tax breaks on investments in research and development, among other fields. This shows the framework’s carrot-and-stick approach.

Companies’ internal reserves, meaning the accumulation of corporate profits, had ballooned to ¥484 trillion as of the end of March this year, an increase of about 60% from eight years ago. It is important to put such funds to use by investing in the workforce.

However, it is not easy to realize that through the tax system alone. About 60% of companies in the nation are in the red and do not pay corporate tax, and would receive no benefit from a tax reduction.

Kishida has said companies that raise wages even though they are in the red would receive more subsidies. However, small and midsize enterprises, which account for about 70% of the entire workforce, often have fragile business foundations.

It is important to implement measures that enable companies to boost productivity and implement sustainable wage hikes. It would probably be effective to provide support for digitization and employee training, among other areas. If the aim is to expand the middle class as Kishida advocates, a comprehensive picture of measures for encouraging companies, including small and midsize ones, to raise wages should be presented.

When it comes to measures for the distribution policy, the strengthening of taxation on financial income, such as capital gains from stock sales, will also be a major issue. However, the framework only states that it is “necessary to examine this issue from the perspective of ensuring fairness,” putting off a conclusion until at least next year.

Kishida views the “¥100 million barrier” as a problem. This refers to the quirk of wealthy people paying proportionally lower income tax once their annual income exceeds ¥100 million.

It is undesirable for the wealthy alone to see their coffers swell thanks to rises in stock prices as a result of monetary easing and other factors. It is necessary to discuss how to rectify this, but there are also concerns over the impact this might have on the stock market. It is desirable to take time to examine this issue.

— The original Japanese article appeared in The Yomiuri Shimbun on Dec. 11, 2021.