Photo/Illutration PAC-3 missile launchers installed on Ishigaki Island in Okinawa Prefecture point toward the west on June 2, 2023. (Asahi Shimbun file photo)

The government and the ruling Liberal Democratic Party have started discussions on raising income tax rates in fiscal 2027 to secure revenue for increases in defense spending.

Although strong opposition to the tax hike is expected, LDP officials are already emphasizing the need to strengthen Japan’s defense capabilities.

Based on three security-related documents, the government is supposed to increase defense spending to 2 percent of GDP in fiscal 2027.

The annual tax revision approved by the Cabinet in 2022 clearly stated that the government would raise income, corporate and tobacco taxes to fund the increase in defense expenses.

A decision has already been made to impose corporate and tobacco tax hikes from April 2026. But the timing concerning the income tax remains undecided.

An income tax hike alone may not immediately increase the burden on taxpayers because the government plans to reduce the rate of the Special Income Tax for Reconstruction.

The reduction amount will be equivalent to the increase for defense expenses, government sources said.

The government and the LDP plan to minimize the impact on reconstruction funding by extending the period in which the reconstruction tax is imposed.

But the tax increase for the purpose of defense spending is expected to be a permanent measure without a fixed term, meaning the burden on taxpayers will rise in the long run.

A conclusion must be reached by the end of December to raise the income tax starting from fiscal 2027 as scheduled.

If the tax hike is delayed, a senior LDP official said, “Neighboring countries may see the postponement itself as a sign of Japan’s limited defense capability.”

The government and the LDP will soon make formal judgment.

(This article was written by Haruka Suzuki and Kanako Tanaka.)

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