Japan To Phase Out Income Tax Cut By 2007

by Mary Swire, Tax-News.com, London

19 September 2005

The Japanese government will complete the phasing out of an income tax cut, designed to pull the country out of recession, by 2007, although the ruling Liberal Democrat Party (LDP) is insisting that the move is line with its pledge not to raise taxes on salaried workers.

Introduced in 1999 in an attempt to kickstart the languishing economy, the temporary tax cut reduced the income tax burden at the national level on workers by 20%, and at the local level by 15%.

Late last year, with the economy showing signs of recovery, the coalition government decided to cut the national tax cut in half in January 2006, and the local tax in half by June 2006.

According to Hiromitsu Ishi, chairman of the government's Tax Commission, the remainder of these tax cuts will be abolished completely in fiscal 2006, meaning that by March 2007, they will have been phased out in their entirety. Ishi told the Asahi Shimbun that this was a necessary step to help the government meet its future budgetary plans.

"If we don't repeal the reduction, we will never be able to carry out drastic tax reform in fiscal 2007 as suggested by Prime Minister Koizumi," he stated.

Meanwhile, a senior LDP lawmaker denied last week that the party had reneged on its promise not to increase income tax.

"Increasing taxes for salaried workers and scrapping the fixed-rate income tax cut are totally different matters. I don't think that putting the temporary tax cut back to its normal state can be called a tax increase," the lawmaker was quoted as observing.

It is estimated that the plan to reintroduce tax rates at former levels will boost government revenues by 3.3 trillion yen per year.

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