The ruling coalition approved Friday a tax reform package for fiscal 2019 starting in April that gives consumers greater incentives to buy homes and cars, in an attempt to underpin demand after a consumption tax hike slated for October next year takes effect.
Prime Minister Shinzo Abe’s Liberal Democratic Party and its coalition partner Komeito signed off on a draft of the package, which will be the basis for legal revisions to be submitted to the ordinary Diet session beginning in January.
Economists have warned that raising the consumption tax from the current 8 percent to 10 percent could cause a large drop in demand, especially for big-ticket purchases.
To prevent such a scenario, the ruling bloc said it will cut taxes on car ownership to coincide with the Oct. 1 tax hike. Car owners will save between ¥1,000 to ¥4,500 a year, with the deepest cuts for those with small cars.
People with home mortgages will keep the current benefit of deducting up to ¥500,000 from their annual income and residential tax payments for 10 years. Under the tax reforms, homeowners can deduct 2 percent from the building’s taxable value over the following three years.
LDP tax panel chief Yoichi Miyazawa on Friday touted the measures as “able to soundly prevent a decline in demand.”
The first half of the consumption tax hike in 2014 caused a surge in spending beforehand and a sharp fall afterward, causing the economy to contract just as it was beginning to recover from the effects of a decade and a half of deflation.
The Abe administration is preparing more than ¥2 trillion in fiscal stimulus in the initial budget for fiscal 2019, to prevent a repeat of that scenario, government sources have said.
The reforms also include a revision to the government’s furusato nōzei (hometown tax donation) system, which allows taxpayers to make donations to the municipality of their choice and receive tax cuts. The ruling coalition said it would place stricter guidelines on the gifts that cities and towns offer to attract potential donors.
Under the new guidelines, the gifts — often consisting of agricultural products such as rice or meat — must be worth no more than 30 percent of the donation, and be produced within the municipality receiving the donation. Those that break this rule will be banned from the program from June.
The tax reform package’s unveiling on Friday came after a two-day delay due to some last-minute wrangling over supporting one-parent families.
Single parents who have never been married and have income below a certain level will receive cuts to residential tax, as well as a ¥17,500 benefit a year on top of their current benefits.
Under the package:
- Tax deductions for people with home mortgages will be extended from the current 10 years to 13 years.
- A person buying a new car after Oct. 1 will pay between ¥1,000 to ¥4,500 less in annual car ownership tax.
- Municipalities offering overly expensive gifts to attract “hometown tax” donors will be banned from June 1.
- Single parents who have never been married and have low income will receive tax cuts and ¥17,500 a year in additional benefits.