Japan to use more tax incentives to encourage wage increases
JAPAN’S ruling Liberal Democratic Party agreed to offer more tax incentives to companies that administer large wage increases, potentially helping to boost the nation’s chances of achieving the virtuous cycle of pay gains and inflation needed for the central bank to pare stimulus.
The LDP’s tax reform panel approved a reform plan for next fiscal year that extends tax incentives to large companies that raise wages by 7 per cent or more, designating up to 35 per cent of the value of those increases deductible from corporate taxes if the companies also qualify for credits related to training and childcare support.
Companies that implement more modest salary increases will see smaller tax benefits. Companies will be able to deduct 15 per cent-25 per cent of salary increases ranging between 3 per cent and 7 per cent.
Whether the new tax incentives will support sustainable wage growth is a major concern for the Bank of Japan. Governor Kazuo Ueda recently reiterated the importance of pay growth, explaining to Prime Minister Fumio Kishida that he’s monitoring the strength of overall demand and whether any wage gains will support prices, one of the preconditions for normalising policy.
Tax incentives aimed at spurring wages have had mixed results in the past. They carried no benefit for the many small businesses that operated in the red and therefore paid no taxes whatsoever.
Kishida has been advocating for large wage hikes through various means, including holding a rare meeting with the heads of the country’s largest business lobby and labour union federation.
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Japan achieved its largest wage increase in nearly three decades this year, but price hikes outpaced those gains. Sticky inflation has been eroding consumers’ appetites, dragging down private spending and hindering the country’s overall economic recovery.
The tax plan for next fiscal year includes 40,000 yen (S$374.63) income tax cuts for households with incomes under 20 million yen per year. It also has provisions for 100,000 yen cash handouts to low-income households.
Even as Japan’s public finances strain under the burden of the highest debt-to-GDP ratio in the developed world, Kishida has sought to boost defence spending. Discussions around raising taxes to finance those costs resulted in an agreement to raise taxes on heated tobacco at a future date, while other details have yet to be decided.
Finance Minister Shunichi Suzuki separately has said he expects to secure an additional 1 trillion yen or more through an increase in the surplus in the General Account and other means to cover defence spending. BLOOMBERG
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