Small Size Tax Reform

The leading coalition parties, Liberal Democratic Party and Komeito, decided FY 2017 tax reform plan on Thursday. On spousal income credit that had been highly controversial, both party agreed on raising threshold of tax break from ¥1.03 of annual income of spouse to ¥1.5. While tax on beer will be reduced, cheaper beer-taste drinks are going to be taxed more. Overwhelming changes in tax system this fiscal year will be contained in small size.

Based on a traditional or even obsolete notion that men go for working and women stay home to hold house, Japanese tax system had ¥380 thousand of tax reduction for a worker with spouse without income or with annual income of ¥1.03 or less. If the spouse had annual income more than ¥1.03, the worker cannot receive the benefit of tax reduction. New tax reform will raise the limit from ¥1.03 to ¥1.5. To keep overall revenue, the government will introduce new limit on main earner’s annual income at ¥11.2 million or the less for being applied to the tax break.

New system was introduced to implement the policy to mobilize as much women workforce as possible by Shinzo Abe administration. Spouses, mainly women, has been limiting her part-time job within annual income of ¥1.03 to receive the benefit of current tax break. Abe thought it would have negative impact on Japanese economy, which had been requiring more workforces. This is a new attempt with incentive through tax system, which outcome is still unclear so far.

In tax on alcohol, Abe administration targets the people with low income, who like taste of beer. To encourage consumption of cheaper beer-like drinks, such as sparkling liqueur or “the third type of beer,” the government has kept tax on those drinks low. But, to balance tax between beer and those quasi-beer, new tax system will vest higher tax on cheap drinks.

Tax break on eco-car will be declining. The coalition parties set stricter standard of fuel efficiency for tax reduction on purchase of car. On the other side, the expiration of eco-car tax reduction at next spring will be extended for two years. While nine out of ten new cars can receive the benefit of eco-car tax break now, they will be reduced to seven out of ten in FY 2018.

Abe has been active on introducing new incentives in tax system for his growth strategy. But, Ministry of Finance was reluctant in tax break, being afraid of introducing confusion in tax system. As seen in this small-size tax reform, Abenomics is facing a gridlock.