The ruling coalition’s tax policy guideline for fiscal 2014 once again reflects the Abe administration’s apparent emphasis on providing economic benefits to corporations at the expense of households that will bear the brunt of the consumption tax hike to 8 percent beginning in April.
The Liberal Democratic Party and its coalition partner New Komeito agreed to introduce lower consumption tax rate on daily necessities such as food after the tax rate is increased further to 10 percent, presumably in October 2015, but left vague the time when the reduced rate for necessities will kick in.
Meanwhile, tax breaks on high-income salaried workers — with an annual pay of ¥10 million or more — will be scaled back beginning in 2016.
The corporate tax surcharge designed to promote reconstruction of Tohoku areas hit by the March 2011 quake-tsunami disasters will be scrapped at the end of March — one year earlier than planned whereas the individual income tax surcharge is set to remain in place for 25 years from 2012.
All companies will be allowed to log 50 percent of the costs of their business meals as nontaxable expenses for two years beginning in fiscal 2014. Currently such deductions are authorized only for small and medium-size firms.
The government has indicated that some tax cuts for corporations are meant to encourage more firms to raise wages for their workers, thereby facilitating a positive cycle of increased consumer spending and greater corporate investments.
Still, whether such a scenario comes true depends a lot on business management, which, according to the latest survey on business sentiment by the Bank of Japan, expects the economy to take a turn for the worse after three months, and it remains to be seen how broadly workers’ wages will be raised.
The reduced tax rate on daily necessities is intended to ease the impact of a higher consumption tax rate on consumers, especially low-income households. New Komeito had called for introduction of the differentiated rate simultaneously with the raise of the tax rate to 10 percent in October 2015 — as stipulated by the law if the prime minister decides to go ahead with the tax hike. But the LDP remained wary of reducing tax revenues and adding clerical work for businesses. In a compromise, discussions on when the reduced rate will kick in and what specific items will be covered were postponed to 2014.
Some of the auto-related tax measures will hit households. While the auto acquisition tax will be reduced for people buying new cars and will be scrapped when the consumption tax rises to 10 percent, taxes imposed on minicar owners will increase from fiscal 2015.
Under the new tax regime, the government expects to collect ¥5.1 trillion in added revenue from the imposition of the higher consumption tax in fiscal 2014, while tax breaks overall will pare this amount by an estimated ¥740 billion.
According to an estimate by Dai-ichi Life Research Institute, the tax hike will place an additional burden of ¥74,000 a year on a model household consisting of a couple with two children and earning ¥5 million to ¥5.5 million annually. In accordance with the regressive nature of the consumption tax, the lower a household’s income, the harder it will be hit by the tax increase.
The government must closely monitor the impact of the consumption tax hike and be flexible about additional measures to support the household sector.