Why is Japan reviving the debate over higher taxes on investment income?
But Kishida quickly shelved the plan amid criticism from investors who feared a possible shift from the market-friendly economic policies under former Prime Minister Shinzo Abe and blamed Kishida for the stock market decline at the time (Photo: Reuters)
The leadership battle for Japan’s ruling party has revived the debate over raising taxes on investment income, a policy the outgoing prime minister had already shelved as the world’s fourth-largest economy tries to raise revenue to fund its massive budget.
The investment income tax β levied on capital gains on stocks and real estate, dividends and interest payments on savings and Japanese government bonds β has been set at a uniform 20%. This is lower than the progressive tax rates on salaries, which can reach 45%. This is an attempt to encourage investment.
The flat tax system reduces the total burden for high-income earners, who generally earn more from investments.
The problem is often referred to as the β100 million yen wallβ problem because the tax burden falls relative to income for people earning more than 100 million yen ($698,080).
Raising the investment tax was one of Prime Minister Fumio Kishida’s key policy promises when he took office in 2021, as he sought to redress wealth disparities in his push for “new capitalism.”
But Kishida quickly shelved the plan after facing criticism from investors who feared a possible shift from the market-friendly economic policies of former Prime Minister Shinzo Abe and blamed Kishida for the stock market decline.
Kishida’s “new capitalist” agenda later shifted its focus to converting households’ dormant savings into investments, partly to hedge against rising inflation. It also made permanent a program offering tax breaks for households’ stock investments.
Kishida is set to step down this month, ending a three-year term marred by political scandals. The ruling Liberal Democratic Party (LDP) is expected to elect a new leader on September 27, and thus the country’s next prime minister.
Shigeru Ishiba, the former defense minister who is running for leadership, told an announcer that he would raise taxes on investment income if he became the next prime minister.
The comments prompted other candidates to express their own opinions.
Digital Affairs Minister Taro Kono, former Environment Minister Shinjiro Koizumi and former Economic Security Minister Takayuki Kobayashi voiced their objections, saying the policy would run counter to government efforts to shift savings to investment.
Ishiba later made it clear that higher taxes should only apply to the rich.
About half of the 2 trillion yen ($14 trillion) of household financial assets is held in cash or bank deposits. The government is trying to change this through policies including the tax-free stock investment program NISA for individuals.
Higher investment taxes, if formally proposed, would first have to be discussed by the ruling party’s tax panel toward the end of the year, where such a plan would likely face some opposition. Komeito, the LDP’s junior coalition partner, has also expressed reservations.
First publication: 06 Sep 2024 | 11:20 am IST