Japan eyes 3 taxes as funding for defense spending increase

Yomiuri Shimbun file photo
The headquarters of the Liberal Democratic Party in Tokyo

The special income tax for reconstruction, tobacco tax and corporate tax are being eyed to fund a planned increase in defense spending, according to sources.

The government and the ruling coalition of the Liberal Democratic Party and Komeito aim to raise these taxes in stages from fiscal 2024 to bolster the nation’s defense capabilities. Regarding the corporate tax, they are considering a surtax system in which an extra tax is added without changing the original tax rate, so as not to increase the burden on small and midsize companies, the sources said.

Executive members of the LDP’s Research Commission on the Tax System, chaired by Yoichi Miyazawa, confirmed these plans at an informal meeting in Tokyo on Sunday. The plans will be included in tax reform proposals for fiscal 2023 to be compiled by the ruling parties this week, according to government and ruling party sources.

Prime Minister Fumio Kishida has expressed his intention to raise taxes by more than ¥1 trillion a year to cover the increase in defense expenditures. The government envisions keeping the corporate tax rate unchanged but adding a special surtax that is expected to secure ¥700 billion to ¥800 billion, the sources said.

In consideration for small and midsize companies, the surtax will be added to annual corporate taxes paid by companies after a certain amount has been deducted. The temporary special corporate tax introduced during the 1991 Gulf War was calculated by deducting ¥3 million from a company’s corporate tax, and then multiplying the remaining amount by 2.5%.

This time, a larger deduction than ¥3 million is being considered.

The government and the ruling parties envisage increasing the revenue from the special income tax for reconstruction and the tobacco tax by about ¥200 billion each.

The special income tax for reconstruction, which is intended to fund measures for recovering from the 2011 Great East Japan Earthquake, is set at 2.1% of income tax. It resulted in revenue of about ¥440 billion in fiscal 2021.

This tax was originally expected to generate about ¥7.5 trillion over the 25 years after the disaster. To secure this amount and thereby maintain financial resources for reconstruction measures, the application period for this tax will be extended past its current end date of 2037.

Discussions on the tobacco tax will focus on how much the tax will be increased on items such as paper cigarettes and heated tobacco products.

Kishida has instructed the tax councils of the LDP and Komeito to consider specific tax items to be increased and when to raise them. However, coordinating the different views is likely to be difficult, as some members of the government and the ruling parties have expressed opposition.

“It’s hard to understand why the prime minister would say things that will dampen [companies’] motivation to raise wages at this point,” Sanae Takaichi, the minister in charge of economic security, said on Twitter.