Japan eyes higher corporate, tobacco taxes to fund defense spending

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Japan is considering raising corporate and tobacco taxes in stages, as well as tapping revenue from a temporary tax measure for its recovery from a major earthquake, to cover a planned increase in defense spending, according to people with knowledge of the matter.

The ruling coalition of the Liberal Democratic Party and the Komeito party is exploring stable funding sources for a combined 43 trillion yen ($315 billion) in defense spending over the next five years from April.

Prime Minister Fumio Kishida has said some 1 trillion yen annually will have to be secured though tax increases after fiscal 2024 or later.

Under one government plan, 700 to 800 billion yen will be secured through higher corporate taxes and around 200 billion yen by hiking the tobacco tax.

Another 200 billion yen would come from the temporary income tax measure adopted in the aftermath of the 2011 major earthquake and tsunami, the sources said.

Kishida’s push to increase tax burdens has prompted a backlash from some ruling party lawmakers, as well as from some Cabinet ministers, calling for bond issuance to finance the increased defense spending.

But the prime minister has ruled out new government bonds as a stable funding source, with Japan’s fiscal health in dire straits. The ruling coalition is expected to finalize a tax reform plan for the next fiscal year later this week.

After the 2011 disasters, Japan imposed a 10 percent corporate tax surcharge.

The government is considering limiting the rise in corporate tax burdens to a small increase this time and taking steps to soften the impact on small and midsize companies, the sources said.

For individuals, the government has a temporary 2.1 percent special reconstruction income tax until 2037 to aid reconstruction in the disaster-hit Tohoku region in the northeast.

It is now weighing the possibility of extending the time limit and diverting part of that revenue to defense spending, according to the sources.

Kishida has said the government will not raise income taxes, given the severe situation facing households.

The planned increase in annual defense spending, which has long been capped at around 1 percent of gross domestic product, is aimed at better coping with the severe security environment amid China’s assertiveness, North Korea’s missile and nuclear development, and Russia’s war on Ukraine.




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