The ruling Liberal Democratic Party-Komeito coalition unveiled on Thursday a fiscal 2018 tax reform plan featuring increased levies for high-income earners and smokers, as well as the creation of a controversial departure tax targeting tourists leaving Japan.

At the center of the proposed package, set to be rubber-stamped for Diet submission early next year, is a plan to impose a heavier income tax on company workers who earn more than ¥8.5 million each year.

About 2.3 million corporate workers are projected to see an increase in their tax burdens as a result, because the new plan will lower the upper limit for income tax deductions.

The reforms are projected to raise tax revenues by a total of about ¥90 billion when they take effect in January 2020.

The package also highlights the establishment of the so-called departure tax that will require departees — both Japanese and foreign — to pay ¥1,000 when they leave Japan.

The ruling coalition estimates resulting revenues will amount to an annual ¥40 billion, which it claims will be spent developing tourism infrastructure and improving fast-track systems at airport passport-control. The new departure fee will be rolled out as early as January 2019, according to an outline compiled by the ruling coalition.

Among other reforms proposed by the pair is a tobacco tax hike that will affect not only traditional paper-wrapped cigarettes but also increasingly popular heat-not-burn electronic cigarettes.

Currently a tax of ¥12.2 is imposed on each cigarette, or about ¥244 for a pack of cigarettes. But the ruling coalition proposed that the tobacco tax be incrementally raised from October 2018 through October 2021 to ¥15.2 per cigarette, or a tax hike of ¥60 per pack.

The tobacco tax hike is expected to boost government revenues by ¥240 billion a year.

The tax reform proposals are expected to be approved in full during an ordinary Diet session starting in January.

As for heat-not-burn devices, which have quickly established a domestic fan base due in part to their weaker smell and supposedly lower health risks, their taxes will be recalculated at a higher rate over a five-year period, affecting all three major e-cigarette brands currently sold in Japan.

The coalition also plans to create a new tax designed to fund government efforts to preserve Japan’s forests, charging eligibleresidents an annual ¥1,000.

The income tax reforms drawn up this year come in response to a recent increase in the population of nontraditional workers such as freelancers and the self-employed, and are designed to rectify a system long considered favorable to company employees.

The idea is to slash tax deductions for company employees, which remain off-limits to nonregular workers, by a uniform ¥100,000.

This year the ruling bloc has targeted in particular employees with an annual salary of more than ¥8.5 million. This should lead to an annual ¥45,000 tax hike on those who earn ¥10 million per year, according to the ruling bloc’s estimates. These hikes, however, will not apply to employees looking after dependents under 22 or family members who require nursery care.

“The current situation in Japan is that tax rates vastly differ depending on the way people work. The amount of deductions for which freelancers are eligible is much smaller than that of salarymen, even if they are entrusted with the same job responsibilities,” said Yoichi Miyazawa, head of an LDP panel on taxation reform, at a news conference in Tokyo.

At the same time, the ruling coalition called for a uniform ¥100,000 increase to taxable income deductions for all taxpayers. The move would result in lower taxes for freelancers and other non-regular workers.

Kenji Yumoto, chief senior economist and vice chairman of the Japan Research Institute, said deductions for company employees are being meted out so generously in Japan that merely adjusting their upper limit does little to redress Japan’s income disparities.

“I also think it’s a questionable policy that high-income earners, however much money they make, can avoid an increase in their income taxes as long as they have children or family members in need of nursing care,” he said.

“If the government has a policy of prioritizing households with children and the elderly, what it should really do is to create a new tax break that applies to low-income earners with those family members, instead of making high-income earners exempt” from an increased levy, Yumoto said, calling the envisaged tweak “merely cosmetic.”

This year’s discussions underlined the changing nature of the LDP’s Research Commission on Tax System, formerly a pillar of the LDP’s decision-making power on taxation that in its heyday even saw the party override the views of central government.

However, Prime Minister Shinzo Abe’s unprecedented winning streak in national elections has significantly changed the power balance within the government, giving Abe’s cohort more say.

Reports say talk of establishing the departure tax, for one, gained momentum after it was strongly promoted by Chief Cabinet Secretary Yoshihide Suga.

The LDP also reportedly had to rethink its initial decision to impose a heavier income levy on those who earn more than ¥8 million, rather than the ¥8.5 million threshold to which this was later revised, after facing opposition from the government and Komeito, which wanted to minimize a backlash from middle-class voters.

The following is the gist of a tax reform package for fiscal 2018 approved Thursday by the ruling coalition of the Liberal Democratic Party and Komeito:

  • Salaried workers earning over ¥8.5 million annually will pay higher income taxes from January 2020.
  • Corporate tax burdens will be cut for companies raising wages and increasing capital investment.
  • Tax rates on tobacco products will be hiked in stages from October 2018.
  • Each person departing Japan will pay ¥1,000 from Jan. 7, 2019.
  • New tax for forest management and conservation will be introduced in fiscal 2024.

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