As the ruling Liberal Democratic Party's proposal to fund a defense budget hike with a special income tax originally intended for disaster reconstruction draws criticism, party executives are planning to split the levy in half and create a new defense tax.

The LDP tax panel on Thursday agreed on the basic framework of using corporate tax, tobacco tax and income tax for the increase in defense spending over the next five years through the fiscal year beginning April 2027, while details were left for its chairman, Yoichi Miyazawa, to decide. The LDP and its junior coalition partner Komeito are expected to sign off on the plan on Friday.

The reconstruction tax adds a 2.1% levy to individual income tax through 2037, generating about ¥400 billion ($2.9 billion) in revenue for the government each year.

The initial plan was to use a total of ¥200 billion from the tax revenue for defense spending. But many lawmakers had concerns about appropriating the reconstruction tax for a totally different purpose. The latest plan, therefore, is to reduce the 2.1% levy to 1% at a suitable time after 2024 and appropriate the remaining portion as a new “defense purpose tax.”

For taxpayers, the burden will remain the same, which policymakers believe will make it easier for the public to accept. However, the government is also planning to extend the duration of the reconstruction tax for “as long as necessary,” raising the prospect that taxpayers will have to shoulder additional tax burdens.

Bearing in mind the concerns of people in disaster-affected areas, reconstruction minister Kenya Akiba said that even if the reconstruction tax is halved, the government will make efforts to ensure the total amount of support won't change by making use of the levy's extension.

Prime Minister Fumio Kishida aims to spend a total of ¥43 trillion between fiscal 2023 and fiscal 2027 on defense. The government plans to secure funding by cutting other areas of spending and utilizing some surplus money and nontax revenue, but it is expected to fall short by ¥1 trillion.

Discussions have centered on how to fund the ¥1 trillion shortage. LDP tax panel executives are hoping to raise the necessary funds through tax hikes, which is an unpopular move.

The tax increase plan would involve raising the corporate tax, bringing in about ¥700 billion to ¥800 billion; increasing the tobacco tax, raising about ¥200 billion; and creating the renamed defense tax, which would generate about ¥200 billion.

For the corporate tax, the plan is to add on a 4% to 4.5% levy on the amount of tax, and to keep the base tax rate as is.

Businesses with an annual income of ¥10 million or less will be exempted from the tax hike, which would cover 90% of small to midsize companies.

The talk of tax hikes come as the public grapples with rising prices and stagnant wages. When it was reported that Kishida said “the Japanese people should (accept the tax hike) as their responsibility” during a party meeting earlier this week, criticism mounted on social media, with users saying the government should be responsible for the funding, rather than the people.

On Thursday, Chief Cabinet Secretary Hirokazu Matsuno told a news conference that the senior LDP official who quoted Kishida mistakenly read the original prepared text when he briefed reporters, and that Kishida had changed the phrasing when he made the remark.

Matsuno said the correct quote from Kishida was, “we should (accept the tax hike) as our responsibility.”

Information from Kyodo added