Prime Minister Fumio Kishida asked senior ruling coalition executives on Friday to consider reducing income tax as a temporary measure to relieve households from the adverse effects of inflation, in his latest push for the redistribution of economic growth.
While details need to be worked out toward the year-end, party executives said after meeting with Kishida that a tax cut will likely be effective for a year and a separate payout program will help low-income earners who are already exempt from taxation and would be otherwise left out of the loop.
A cut in income tax is expected to be a key feature of an inflation-relief package that the Cabinet plans to finalize on Nov. 2, as rising prices of everyday goods are already squeezing household budgets while real wages are falling.
"The aim is to return part of the increased tax revenues seen in recent years to everybody until we can see the momentum for wage hikes firmly in place," Koichi Hagiuda, policy chief of the Liberal Democratic Party, told reporters after visiting Kishida at his office on the opening day of an extraordinary Diet session.
Critics questioned the effectiveness of a tax cut as a means to alleviate the pain of rising prices of everyday goods, and cite the lengthy process and legislative work that would be required to implement such a reduction.
Even if legislation is approved during a regular Diet session that normally begins in January, the earliest Japanese households would feel the benefits of a tax cut would likely be next spring.
Kishida is struggling to shore up dwindling public support amid persisting speculation that he is trying to decide on the best timing to dissolve the House of Representatives for a snap election. Ahead of by-elections on Sunday, the tax reduction plan is seen as an attempt to dispel the perception among some voters that he is pro-tax hikes.
Some opposition lawmakers and critics have lashed out at the government for its perceived inconsistency because, on the one hand, it is pushing for higher taxes to help fund a substantial increase in defense spending while on the other, it wants to reduce people's tax burdens, albeit temporarily to fight inflation.
Hagiuda said the planned tax hike to secure the necessary funding to enhance defense capabilities should not begin in 2024. "We don't intend to do it next year. We will design a framework based on such a scenario," he added.
Cutting income tax would mean either subtracting a certain amount from tax payments, irrespective of income, or setting a certain subtraction rate.
The LDP's tax policy chief Yoichi Miyazawa, who was also among those who spoke with the premier on Friday, said the first option would be more viable.
As tax burdens increase according to income levels under the current system, the second option would benefit high-income earners. People on low incomes would not feel the benefits because they are already exempt from paying the tax in the first place.
The idea of cutting income tax had emerged within the ruling coalition of the LDP and Komeito but was not on a list of items that each party asked the premier to consider in compiling the economic package.
The government will retain subsidies to reduce utility bills for households as the recent bout of inflation driven mainly by surging import costs and a weaker yen is expected to continue.
The Israel-Hamas war and geopolitical risks in the oil-producing Middle East have added a new layer of uncertainty over the outlook, with crude oil prices rising recently, economists said.
"A tax cut would be a plus for consumption in the short-term. That said, there is a question mark as to whether a temporary reduction can be an effective way to cope with inflation," said Saisuke Sakai, a senior economist at Mizuho Research & Technologies.
He expects core consumer prices, a key gauge of inflation, to stay above the Bank of Japan's 2 percent target until the latter half of fiscal 2024 and real wage growth will likely remain negative.
Japan's tax revenues have hit a record high for the past three business years but its fiscal health is the worst among advanced nations, with its debt more than twice the size of its economy.
The country faces the daunting challenge of reining in its fiscal spending, which swelled during the COVID-19 pandemic, while tackling inflation.
Limiting the issuance of debt remains a priority for the government, even though borrowing costs have been at rock-bottom levels due largely to the BOJ's aggressive bond-buying to achieve stable inflation and sustainable wage growth.
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