The Democratic Party for the People (DPP) did well in the recent general election, increasing the number of seats it held in the lower house from 7 to 28 (11 constituent + 17 proportional). The party with the most number of seats, the Liberal Democratic Party (LDP), has said it will work with the DPP on the latter’s legislation, since one of the main reasons for the DPP’s success (6.17 million proportional votes, or 2.5 times the number it received in 2021) is its pledge to help low-income workers increase their take-home pay. Currently, workers who make up to ¥1.03 million a year don’t have to pay national income tax. The DPP’s plan would raise that ceiling to ¥1.78 million.
The problem for the LDP, which while short of a majority still runs the government at the moment, is that the finance ministry (FM) hates the DPP’s proposal, since it could mean an estimated loss of ¥7.6 trillion in tax revenue for both the central and local governments. In fact, this enmity was so pronounced that last week, after a weekly magazine revealed that DPP head Yuichiro Tamaki was involved in an extra-marital affair, a rumor circulated claiming that it was the FM that leaked such intelligence, though there seems to be absolutely no evidence to that effect. Nevertheless, a lot of people are voicing serious concerns about the tax threshold policy, saying that it not only would deprive the country of much needed tax revenue, but that the whole proposal is based on “an enduring economic myth,” in the Japan Times’ words. The problem, however, is that many aren’t completely clear about the math of the proposal. In the simplest terms, the DPP wants lower income workers to keep more of their pay, which they will thus spend more freely and help stimulate the economy—and, in turn, generate more tax revenue. Moreover, the received wisdom about the current tax ceiling is that the part-time workers who make up the vast majority of the people to whom the ceiling applies tend to limit their work hours in order to make sure their annual pay does not exceed the ceiling, thus causing problems for employers who require more labor, not to mention the workers themselves, since it restricts their ability to earn. Those who object to the proposal mainly have an issue with this latter belief, saying that very few workers actually limit their work hours for tax reasons, because even if they break through the ceiling the tax they have to pay is so minimal that it makes no real difference.
Financial planner Hiroko Ishikura explains on her blog that the situation is more involved than the media has let on, and that, in fact, explaining the various dynamics at play is difficult, since disposable income is determined by a number of factors beyond one’s basic pay, including social security premiums and the worker’s status as a dependent. When you include all these other factors it’s not so clear if the proposal has much meaning as either a stimulus of or a drag on the economy. It’s true that the tax ceiling in question probably doesn’t affect most workers’ final decision as to how much they will work in a year, but there are other ceilings that might.
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