Why are ruling party lawmakers calling for tax cuts?

Typically when there are widespread calls for tax cuts among politicians it is opposition lawmakers criticizing the ruling parties’ policies.

But as Prime Minister Fumio Kishida’s administration prepares a new economic stimulus package, it's members of his own party who are raising a fuss.

What is behind the rising calls and, more importantly, is a tax cut feasible?

Last week, a group that consists of more than 100 members of the ruling Liberal Democratic Party submitted a package of policy proposals to party executives, saying that the government should consider income tax cuts and temporarily lowering the consumption tax rate to 5% from the current 10%.

Komeito, the LDP’s junior coalition partner, is also on board, claiming that tax relief can be an effective measure in the stimulus package.

“In terms of taxes, I think (cutting) income tax is a realistic and appropriate way to deal with the price hikes,” Komeito leader Natsuo Yamaguchi said earlier this week.

But since lowering the rates of the consumption and income taxes will require time-consuming legal amendments, distributing cash will likely be an effective option when it comes to speed, he said.

Despite the growing calls for tax cuts among lawmakers, such moves seem to be “intended to gain popularity from voters with a general election in mind,” Takahide Kiuchi, executive economist at Nomura Research Institute, said in a report.

Lawmakers have been keeping a close watch for signs that Kishida will dissolve the all-important Lower House for a snap election. Although some local media reported earlier this month that Kishida is unlikely to call a snap election later this year, speculation that he would actually do so is still present in the political arena.

The momentum for tax cuts began to gain steam when Kishida announced last month that the government will compile a new economic stimulus package by the end of October.

“Tax revenue increases — the fruit of growth — should be appropriately given back to the public,” Kishida said, as lingering inflation continues to burden society.

Based on Kishida’s apparent willingness to consider tax cuts, some LDP executives have even voiced support for such moves.

“It is possible to directly give back (the increased tax revenue) to the public through tax cut measures,” LDP Secretary-General Toshimitsu Motegi said last week.

According to the Finance Ministry, tax revenue for fiscal 2022, which ended in March, was ¥71.1 trillion, a record high for the third consecutive year, due to a recovery from the pandemic and price hikes. 　

The Finance Ministry, however, is reluctant to throw its support behind the tax cuts.

“Basically, my understanding is that we don’t really have a lot of increased tax revenue that we can spend (to introduce tax cuts),” Finance Minister Shunichi Suzuki said Oct. 6.

People shop for daily necessities at a market in Tokyo in March. | REUTERS

Suzuki mentioned that the tax revenue can change due to various factors, so there is no guarantee that it will keep increasing, noting that corporate tax revenue in the past few months has not really been increasing.

“The consumption tax is a critical financial source to sustain social security, so cutting its rate needs a very careful assessment,” Suzuki said, referring to the LDP group’s proposal.

Major tax breaks will likely become a problem further down the road since the government is planning on ratcheting up spending on some of its key policies, such as defense and child care support, without securing stable funding.

Kishida has said the government will use a total of ¥43 trillion (about $288.1 billion) between fiscal 2023 and fiscal 2027 for defense spending amid rising geopolitical tensions in Asia, about 1½ times more than in the previous five years.

Moreover, in an effort to deal with the country’s plummeting birthrate, Kishida has pledged to bolster the budget for child care policies over the next three years, with an extra ¥3.5 trillion to be spent each year.

While the ruling parties may be eager to win voters’ hearts through the new stimulus package, Kiuchi of Nomura Research Institute is skeptical about whether such major fiscal spending is necessary now.

According to the Cabinet Office, Japan’s demand turned positive in the April-June quarter to exceed supply for the first time in almost four years — a sign that inflation may be growing.

Economic stimulus is normally designed to increase demand through fiscal spending, so given that the demand has turned positive, there is no need to do so, Kiuchi said, adding that the increased tax revenue should instead be used to reduce government debt.