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The government and ruling parties are to offer generous tax breaks to companies that raise wages. To broaden the scope of pay increases, it is essential for the system to effectively support small and midsize enterprises.
Economic measures approved at a Nov. 2 Cabinet meeting included plans to expand the tax system with an eye on encouraging private-sector companies to hike worker remuneration. Tax policy research panels of the Liberal Democratic Party and Komeito will explore specific measures and thrash out the system’s details by year-end.
This year’s shunto spring labor wage negotiations produced the highest average wage increase in 30 years. The domestic economy has reached an important juncture regarding its ability to overcome soaring prices and achieve a virtuous cycle of wage hikes and economic growth. It will be important for the government to encourage wage increases through its policies.
The tax system to encourage wage hikes serves to reduce corporate tax payments for companies that have raised their employees’ payments from the previous fiscal year. The system, which was established in fiscal 2013, was initially set as a temporary three-year measure. However, it has since been repeatedly extended and expanded.
Currently, the system offers two types of tax incentives: one aimed at small and midsize businesses and another for large companies. If nonmajor enterprises increase their total employee payroll by 2.5% or more from the previous fiscal year, they can qualify for a corporate tax deduction of 30% of any such increase.
Successive Cabinets have used this system to push companies into raising wages, but it is difficult to say that the program has been fully leveraged.
Only about 130,000 of the nation’s roughly 3.5 million small and midsize companies used the tax system in fiscal 2021, resulting in total corporate tax reductions of about ¥145 billion.
It has been pointed out that this is because about 60% of nonmajor firms are in the red and do not pay corporate tax, so they cannot benefit from tax reductions.
As a way to encourage in-the-red companies to raise wages, the government is weighing the possibility of allowing those firms to carry over the equivalent amount of unused tax breaks, due to such companies running a deficit, if they turn a profit in the following fiscal year, or beyond.
Amid the ongoing labor shortage, small and midsize enterprises are finding it difficult to secure personnel based on their present wage levels. The system should be user-friendly, based on an understanding of companies’ needs and make it easy for them to take steps to raise wages for future growth, even if they are not presently in the black.
The government also has established a framework that smooths the way for companies to receive subsidies when they adopt digitization and labor-saving measures on the condition that they significantly boost worker emolument. It is hoped that the government will promote awareness of this system, which is also available to firms that are in the red.
The earning power of small and midsize companies must be enhanced if wage hikes are to take root widely. It is vital to implement measures to help such operations establish new businesses and expand their overseas sales channels. Ideally, such enterprises will be able to augment productivity and strengthen their business foundations.
