Corporate tax hike eyed to finance planned defense spending increase

The Yomiuri Shimbun

16:48 JST, December 9, 2022

A possible corporate tax hike has become the focus of attention by the government and the ruling parties as they look for a stable source of funds for a planned defense spending increase, according to sources. They also plan to discuss the idea of targeting the corporate tax hike at large companies and excluding small and midsize firms.

On Thursday, Prime Minister Fumio Kishida instructed the ruling parties to consider raising tax to secure an additional about ¥1 trillion in fiscal 2027 to partially cover higher defense spending.

At the meeting between the government and ruling parties on the day, Kishida said, “We won’t implement tax hikes from the next fiscal year that will result in increasing the burden on the people, but instead will consider gradually raising taxes through fiscal 2027.”

Kishida also indicated his intention to decide at the end of the year on concrete measures to secure financial sources to fund a dramatic enhancement of the nation’s defense capabilities, considering discussions by the ruling parties’ tax system research commissions on details including the timing of the implementation of tax hikes.

While explaining that about ¥4 trillion in additional financial resources will be needed annually from fiscal 2027, Kishida stated, “For a little more than ¥1 trillion, we have to ask for cooperation from the people on taxes.”

Taking into account the impact of high prices and other issues, Kishida said, “We won’t take steps to increase the income tax for individuals.”

When considering three key taxes that account for a considerable part of the nation’s tax revenue — corporate tax, income tax and consumption tax — there are strong opinions within the ruling parties in favor of a corporate tax increase. For example, a senior lawmaker of ruling coalition partner Komeito said, “It is difficult to raise income or consumption taxes, which would directly hit household budgets.”

The government and the ruling parties intend for the increase to take the form of a surtax as a special measure, instead of changing the tax rate. In the past, the government increased corporate, income and other taxes in the form of a surtax to finance reconstruction after the 2011 Great East Japan Earthquake.

There are opinions within the ruling Liberal Democratic Party in favor of financing additional defense spending with deficit-covering government bonds, but the government does not intend to take that path.

For now, the government is considering obtaining additional financial resources through such measures as expenditure reforms and tapping surplus funds. It also intends to create a “defense reinforcement fund” to finance defense expenditures with nontax revenues and other sources.

The government and ruling parties plan to boost defense spending to about ¥43 trillion over a five-year period beginning in fiscal 2023. Japan’s defense spending in the initial budget for fiscal 2022 is about ¥5.4 trillion. Total defense spending in the current five-year period (fiscal 2019-23) is about ¥27 trillion. A significant increase will be needed to reach ¥43 trillion.

The breakdown of the about ¥43 trillion in spending has yet to be disclosed. But the Defense Ministry is considering using about ¥5 trillion for “stand-off missiles,” a key to the nation’s counterattack capabilities, and about another ¥5 trillion to purchase ammunition.