Ruling Bloc Tax Reform Package: Can Tax Break Proposals Help End Deflation?

Editorial

14:30 JST, December 16, 2023

Although a number of tax-cut measures to help household finances, including fixed-amount cuts in income tax, have been proposed, public expectations have not risen. If the intentions of these measures are not fully conveyed to the public, their effects will likely be limited.

The Liberal Democratic Party and its junior coalition partner Komeito have decided on the ruling parties’ tax reform plans for fiscal 2024. Under the slogan of “exit from deflation,” the measures include fixed-amount tax cuts for income tax and resident taxes, as well as tax breaks for households raising children as part of measures to combat the declining birthrate.

The fixed-amount tax cuts will reduce taxes by ¥40,000 per person, including dependents, beginning in June 2024. Those whose salary income exceeds ¥20 million will not be eligible.

The outline of the tax-cut program had already been fixed at the initiative of Prime Minister Fumio Kishida before it was discussed at the ruling parties’ research commissions on the tax system. Despite the fact that the overall tax cut amounts to ¥3.5 trillion, it hardly can be said that the necessity of the cut has been fully discussed.

Because of this lack of discussion, inadequacies and difficulties have emerged. To implement the tax cut, the government must carefully explain the significance and effects of the move before next June. Examination of the possible effects is also essential.

As part of measures to combat the declining birthrate — one of the policy items the prime minister is focusing on — the government will postpone by one year a reduction in housing loan tax breaks for couples under 39 years of age and households raising children. The reduction was planned to be scaled down from next year.

The “home renovation tax break program,” which deducts a portion of the cost of home improvements from income taxes, now includes tax breaks for installing safety barriers to prevent children from falling out of windows, among other items.

However, given the importance of policy programs, the items proposed are undeniably small in scale. Further expansion of the program should be considered.

On the other hand, the latest tax reform proposals are conspicuous for putting off addressing some issues.

At the end of last year, the government decided to secure a total of over ¥1 trillion from income, corporate, and tobacco taxes by fiscal 2027 in order to drastically strengthen the nation’s defense capabilities. The government had decided to raise taxes in stages over a few years, and a conclusion on the timing of the start of the tax hike was supposed to be reached by the end of this year.

However, the ruling parties, in emphasizing the tax cut, put the lid on discussion of the tax hike, which would lead to an increase in the burden on taxpayers. In the end, the decision on the timing of the tax hike was postponed due to a slump in Cabinet approval combined with criticism of the LDP’s political fundraising problems.

While child allowances will be expanded to cover high school students in December next year, the ruling parties also proposed reducing the scope of the tax exemption for families with high school students. However, discussions of the details met with rough seas, and an official decision was postponed until next year.

This is probably due to concern that there would be opposition to reconsidering the tax breaks.

Many observers have also said the influence of the LDP’s Research Commission on the Tax System, which used to be strong, has declined. If the commission continues to turn a blind eye to the increasing burden, its standing will probably diminish further.

(From The Yomiuri Shimbun, Dec. 16, 2023)