With an eye on propping up sluggish household spending and boosting business investment to aid the economic recovery, the ruling coalition on Tuesday adopted tax reform policies for next year entailing corporate tax cuts and expansion of tax breaks to the wealthy.
By bolstering the profitability of big firms and promoting asset transfers from the elderly to the younger generation, Prime Minister Shinzo Abe hopes to strengthen his “Abenomics” policy mix and energize local economies across the nation.
But the reform plan, crafted by Abe’s Liberal Democratic Party and its junior coalition partner Komeito, does not contain drastic measures to support lower income earners and smaller companies, both dogged by price rises following last April’s consumption tax hike and the weaker yen.
Some analysts say the tax reform proposals are unlikely to help narrow the income gap between people benefiting from Abe’s economic policies and those plagued by their side effects.
The economy shrank for a second straight quarter through September in the wake of the 3 percentage-point consumption tax increase to 8 percent on April 1.
In addition, the deflation-busting Abenomics package, centering on aggressive monetary easing and massive fiscal spending, has undermined the yen’s value and pushed up import costs and domestic fuel prices, dealing a blow to resource-poor Japan.
In the tax reform plan for the fiscal year starting April 1, the ruling coalition will slash the current 34.62 percent effective corporate tax rate to 32.11 percent in fiscal 2015 and to 31.33 percent in fiscal 2016.
The LDP and Komeito, however, have failed to come up with stable financial resources to cover the revenue that would be lost in the tax cuts, sparking fears about the outlook for Japan’s fiscal health — the worst among major industrialized economies.
The Abe administration has pledged to reduce the relatively high effective corporate tax rate to below 30 percent over the next several years.
To shore up private spending, the ruling parties will exempt from taxation in fiscal 2015 gifts of money from parents or grandparents to fund marriage, childbirth and child care of their offspring aged 20 and over.
The tax exemption, which will be applicable for gifts of up to ¥10 million, is designed to tap the huge financial assets held by the elderly to stimulate economic growth, as the nation struggles with the rapidly aging population.
Elderly people are believed to own around 60 percent of financial assets held by individuals in Japan.
The existing tax benefits, including exemption from the capital transfer tax for people donating funds for the education and home purchase of their children and grandchildren, will be extended.
As a step to galvanize regional economies, the ruling bloc will give tax breaks to firms relocating their headquarters to regional areas from Tokyo and other large cities.
In an attempt to prevent offshore tax avoidance, taxation on wealthy Japanese living abroad will be reinforced.
The LDP and Komeito, meanwhile, did not clarify details of reductions in tax rates on daily necessities in their fiscal 2015 tax reform policies.
The two parties will begin discussions in the new year about which items should be subject to the reduced tax rate, aiming to introduce the tax system when the consumption tax rate is raised to 10 percent in April 2017.