Income Tax Cut Plan Criticized over Limited Economic Impact; Concern Grows that Low Income Earners May Get Least Benefit

By Hironari Akiyama and Shinnosuke Kurama / Yomiuri Shimbun Staff Writers

20:00 JST, October 21, 2023

A possible income tax cut has come under criticism for being likely to have only a limited impact on the economy, even while Prime Minister Fumio Kishida on Friday instructed senior ruling party officials to consider measures to reduce the tax.

The government has taken steps in the past to cut income taxes as part of its economic stimulus measures, but many have criticized such measures as bringing little benefit to those with low incomes.

There are also concerns that the planned tax cut will further worsen Japan’s fiscal situation, already one of the worst among developed countries.

Worsening fiscal situation

Kishida instructed Yoichi Miyazawa, chairperson of the ruling Liberal Democratic Party’s Research Commission on the Tax System, to consider measures to cut income taxes, at the Prime Minister’s Office on Friday.

But Miyazawa warned him that it was not good for the trend toward income tax cuts to be gaining ground ahead of discussion by the commission, saying, “Just because you think this way doesn’t necessarily mean it will happen.”

Income tax, levied on annual personal income, is one of the nation’s three key taxes, along with consumption tax and corporate tax.

Income tax revenue in fiscal 2022 was ¥22.5 trillion, accounting for more than 30% of total tax revenue. There are seven tax brackets, with tax rates ranging from 5% to 45%. The higher the income, the higher the tax rate.

About 52 million people pay income tax, including company employees whose income taxes are collected at the source and self-employed individuals who file their own tax returns.

Should a large tax cut be realized, these taxpayers will be able to afford to spend that much more.

Yet Takahide Kiuchi, executive economist at Nomura Research Institute Ltd., estimated that even a ¥5 trillion income tax cut would have only a 0.12% effect on real gross domestic product.

“The economic impact will be limited because [income tax cuts] will further worsen the fiscal situation and consumers can be expected to save the money from the tax cuts [rather than spend it],” he said.

Since the tax cut will require a huge amount of financial resources, the government should first determine whether the policy will be effective enough to be worthwhile.

Bitter outcome

In the past, the government has had to face some bitter consequences.

In 1998, the Cabinet of Prime Minister Ryutaro Hashimoto implemented a “fixed-amount tax reduction” that deducted a certain amount from tax assessments as part of economic stimulus measures following the Asian financial crisis.

Hashimoto implemented large tax reductions on two occasions, totaling more than ¥4 trillion.

The total amount of the tax cut for that year, including local taxes, was ¥55,000 for each individual taxpayer, plus a smaller amount for dependents. However, the government failed to regain its unifying force and was defeated in the House of Councillors election that year.

Later, the Cabinet of Prime Minister Keizo Obuchi implemented a “fixed-rate tax reduction” that deducted a certain percentage from tax assessments in 1999.

The tax break was 20% of income tax, capped at ¥290,000 per year, and 15% of local tax, with no expiration date set. These measures led to the chronic fiscal deterioration of the government.

In 2008 and 2009, both Prime Minister Yasuo Fukuda and Prime Minister Taro Aso considered introducing a fixed-amount tax cut. Both were forced to abandon the idea, but they changed course and introduced programs to provide direct benefits to households due to criticism that the tax cut program would provide little benefit to low-income taxpayers.

Income tax cuts have limited effect on those who pay little or no tax due to their low incomes. A Finance Ministry official expressed concern that the government may be setting itself up to be criticized for raising taxes when it stops offering tax breaks.

Uncertain financial resources

If the government decides to cut income taxes, the cut is expected to be implemented as early as spring 2024. Kishida has stated that the government will return a portion of increased tax revenues to the public, but many issues remain to be addressed in the measures to secure financial resources.

With the economy returning to normal after the pandemic, tax revenues for fiscal 2022 ultimately reached a record high of ¥71.1 trillion, an increase of ¥6 trillion from the original revenue forecast.

However, as of the end of August, tax revenues for fiscal 2023 were down 12.3% year-on-year to ¥14.2 trillion due to changes in the corporate tax payment system.

“We can’t discuss this issue by counting on possible tax revenues in the future,” Finance Minister Shunichi Suzuki said at a press conference Friday.

Hideo Kumano, an economist at Dai-Ichi Life Research Institute Inc. said, “It is inconsistent for the government, which claims that economic activity has normalized, to try to cut taxes.”