Photo/Illutration The National Diet building (Takeshi Iwashita)

For the third straight year, the government and ruling bloc have pushed back the start of a proposed income tax increase to pay for massive defense outlays.

In late 2022, the Cabinet in the Kishida administration approved a five-year plan to increase defense spending by 1.5 times to a total of 43 trillion yen ($280 billion) for five years from fiscal 2023.

How to pay for that increase has been a major headache for the government and ruling Liberal Democratic Party ever since.

It was decided to fund the defense spending outlays over a number of years through increases in personal income tax as well as corporate and tobacco taxes.

But no decision was made on when to start collecting the money.

A decision was twice postponed under Prime Minister Fumio Kishida’s stewardship.

His successor, Shigeru Ishiba, seemed to signal he wanted a decision this year. But on Dec. 13, Yoichi Miyazawa, panel chair of the LDP’s Research Commission on the Tax System, said no personal income tax increase would be levied in fiscal 2026.

A key reason is that the opposition Democratic Party for the People is pushing for a significant increase in the threshold for personal income tax to kick in, and discussions on this are continuing with the ruling coalition.

Junior coalition partner Komeito lawmakers argued that tinkering with the personal income tax for defense spending purposes would not be conducive to the discussions to cut that tax.

The DPP made large gains in the October Lower House election on a pledge to cut income tax. The ruling coalition failed to maintain its Lower House majority and now must ask for the DPP’s support to pass legislation in the Lower House, such as the supplementary budget which passed last week.

Miyazawa said not all was lost because a decision had been made to start raising the corporate and tobacco taxes from fiscal 2026.

Initially, estimates were made that the increases would lead to an increase of corporate tax revenues of between 600 billion and 700 billion yen and an increase in tobacco tax revenues of about 200 billion yen.

Miyazawa said the 1 trillion yen or so needed in fiscal 2026 to cover the increased defense spending would be collected, even without increasing the personal income tax. But for the third straight year, no decision was made on the personal income tax hike, which would have provided a more stable revenue source.

(This article was compiled from reports by Kenta Nakamura, Shinkai Kawabe and Kenji Izawa.)

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