Tax System Revision Debate: When Cutting Taxes, Don’t Forget Promise of ‘Responsible’ Finances

Editorial

14:25 JST, December 3, 2025

Prime Minister Sanae Takaichi’s administration advocates “responsible and proactive public finances,” aiming for tax system revision that emphasizes economic growth. It is hoped that her administration will also take responsibility for funding sources and achieve a strong economy.

The ruling Liberal Democratic Party’s Research Commission on the Tax System is engaging in full-fledged discussions for a tax system revision for fiscal 2026. Together with the tax commission of the Japan Innovation Party, the ruling coalition partner, the LDP’s commission plans to finalize the ruling coalition’s outline for the tax system revision as early as mid-December.

Can they achieve a responsible tax system? One litmus test will be the automobile-related tax system revision.

For the fiscal 2026 revision, the government will begin revising a tax that is levied based on fuel efficiency when purchasing a vehicle. As the automobile industry has been hit by U.S. President Donald Trump’s tariff policy, an industry group seeking to stimulate new car purchases is calling for the abolition of this tax.

However, abolishing the tax would punch an about ¥190 billion hole in annual local tax revenues. Due to concern that money for the development of roads and other infrastructure would be lacking, the Internal Affairs and Communications Ministry opposes abolishing it. As the tax also serves as an incentive for customers to choose fuel-efficient vehicles, abolishing it also poses a problem in that the abolition runs counter to decarbonization efforts.

The hope is that the tax system will be revised so that infrastructure development costs are taken into consideration, and also that there is no discrepancy with future visions, including the transition to electric vehicles.

Finding new financial resources following the already decided abolition of the provisional gasoline tax surcharge and the corresponding surcharge on the diesel oil delivery tax is also a difficult issue. The abolition of the two surcharges will result in a total revenue loss of ¥1.5 trillion, or ¥1 trillion for the central government and ¥500 billion for local governments.

As this is associated with a review of automobile taxes overall, how to deal with the funding sources will be discussed not only for the revision for fiscal 2026 but also for fiscal 2027.

For the fiscal 2026 revision, the government first intends to work to increase tax revenues to some extent through such means as revising special tax measures that lower corporate taxes under certain conditions. It is necessary to boldly abolish projects with limited policy effects and strive to secure alternative funding sources.

Concurrently, the government also is considering tax reductions for investments by companies as part of its growth strategy. One proposal reportedly is to encourage domestic investments such as by creating a tax credit that would deduct 8% of the investment amount from the corporate tax. The scale of the tax reduction would be about ¥500 billion per year.

It is crucial that the special tax measures be designed with the right emphasis on key points.

Raising the “annual income barrier,” or the income threshold for the imposition of income tax, is also a focus. In the fiscal 2025 revision, it was raised from the previous ¥1.03 million to ¥1.6 million.

If this is further raised to ¥1.78 million, as the Democratic Party for the People has been demanding, it would result in a massive loss of tax revenues. With Japan already having the worst fiscal condition among major economies, that seems unrealistic.

Itsunori Onodera, chairperson of the LDP’s tax commission, pointed out that a natural approach would be to raise the threshold in line with price increases. This would be a mechanism to raise the threshold by tens of thousands of yen at a time in response to price increases. It is a reasonable idea.

(From The Yomiuri Shimbun, Dec. 3, 2025)