Photo/Illutration Prime Minister Fumio Kishida meets with reporters at the prime minister’s office on Oct. 20. (The Asahi Shimbun)

Considering the current state of the domestic economy, no reasonable case can be made for a major tax cut.

Prime Minister Fumio Kishida’s proposal to slash income tax is also at odds with his own argument that a new revenue source must be secured, predictably through a tax hike, to finance a sharp increase in defense spending.

The uniform tax reduction he has proposed, which would also cover medium- and high-income earners, smacks of an indiscriminate cash handout. It has all the hallmarks of political sweet talk aimed at gaining short-term popularity with an eye to upcoming elections.

On Oct. 20, Kishida directed the ruling parties to consider a temporary income tax reduction. A fixed amount cut, irrespective of annual income, appears to be the favored idea.

A host of questions remain about his move to curtail this mainstay tax that underpins the government’s functions.

First, neither the objective nor the necessity of such a measure is clear. While Kishida vowed to “protect the daily lives of citizens from sharp price rises,” any tax reduction requires revising the law.

Any tax cut could only be put into effect next summer, at the earliest, which means the measure would not represent an effective policy response to ongoing inflation.

Such an across-the-board tax cut would also benefit households that do not need financial support, weakening the tax regime’s function of income redistribution. Any policy measure to cushion the effects of rising prices should be focused on supporting low-income earners who have been hardest hit by higher prices of daily necessities.

Japan’s economy has been on a recovery trajectory from the fallout of the COVID-19 pandemic. Many economists reckon that the problem of insufficient demand has mostly been cured.

The package of economic measures the government is working on is widely expected to include cash payments to low-income earners and continued gasoline subsidies. Many experts have warned that adding a large-scale income tax cut to the package could further stimulate already solid demand, potentially adding excessive fuel to inflation.

The proposed tax cut should also be called into question from a fiscal point of view. Kishida stressed the measure is designed to “return increased tax revenues to the taxpaying public.” But his narrative about increased tax receipts, which suggests there are ample financial resources, is misleading and out of touch with reality.

While it is true that national tax revenues have kept hitting record highs over the past three years, largely due to inflation, the budget deficit has ballooned from pre-pandemic levels, making the government ever more dependent on debt to finance its spending. This is a result of a series of massive spending packages to ease the impact of the public health crisis, which has expanded expenditures at a rate exceeding revenue growth.

Since it decided on a policy framework to ramp up defense spending late last year, the Kishida administration has been stressing the need for a wider tax front, including an income tax hike, to help raise funds to pay for the plan. So, how can the government afford a tax cut?

Kishida abruptly proposed the income tax reduction just before scheduled Lower and Upper House by-elections, setting aside policy consistency and fiscal rectitude.

The move signals his determination to remain in power at any cost and his willingness to take grossly irresponsible actions to do so. His tax reduction initiative can only be seen as a blatant attempt to garner votes in elections.

Such an ad-hoc and ill-thought-out tax cut further jeopardizes fiscal sustainability and puts the nation’s future at risk.

If he truly prides himself as the responsible helmsman of the nation, Kishida ought to reconsider his directive.

--The Asahi Shimbun, Oct. 21

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