Abe Offers Tax Cuts to Boost Wages and Savings, Promises 30% Tax Rate in Five Years

Japan will cut the tax rate on corporate income by 3.29 percentage points over two years to encourage companies to raise wages and boost investment, at a cost of about 400 billion yen ($3.3 billion) in revenue over the period.

Company income tax will drop by 2.51 percentage points in the fiscal year starting April and a further 0.78 percentage points the next year, according to the ruling coalition’s tax plan, released on 30 December in Tokyo. The government also plans tax-free investment accounts for children and an expansion of tax-free donations to relatives.

The change follows a stimulus package announced last week that boosted subsidies for the poor and support for small businesses. Abe is turning to corporate tax cuts to encourage economic activity after an increase in Japan’s sales levy cut household spending power and pushed the nation into recession.

Japan plans to cut the corporate tax rate to below 30 percent over about five years as part of efforts to stimulate the economy and push companies to spend record amounts of cash. The current rate of about 35 percent is the second highest among Group of Seven nations, according to the Ministry of Finance.

Investment Fails to Respond, Wages Drop

Companies haven’t deployed a record 233 trillion yen in cash holdings into investment or pay, with business spending dropping in the six months through September and wages adjusted for inflation dropping for 17 straight months through November.

“The revisions will be effective in giving companies incentives to raise wages and boost investment, especially for those making profits,” said Kazuhiro Yoshii, managing director of the legal and tax research unit at the Daiwa Institute of Research. “It will have limited effects on the government’s finances as the expansion in the tax base is able to make up for the cut in tax rates to some extent.”

Limited Write Off for Past Losses

To generate revenue to help replace that lost from the tax cuts, the government will reduce the amount of company income that can be written off to cover previous losses. This will be cut to 50 percent by April 2017 from the current 80 percent, with an extension of the period that losses can be carried forward to 10 years from the current nine.

No Tax Individual Saving

The government also intends to expand the Nippon Individual Saving Account program, or NISA, which started this year. It calls for increasing the annual NISA investment cap to 1.2 million yen and creating a junior NISA program for people younger than 20.

NISA currently allows each person to buy as much as 5 million yen of stocks and investment trusts without paying taxes on dividends or profits, subject to an annual cap on purchases of 1 million yen. The junior NISA program would have an annual investment limit of 800,000 yen. There were 7.3 million accounts at the end of June, with 1.6 trillion yen invested.

Tax Free Transfer from Elderly to Relatives

To promote the shift of financial assets held by the elderly to their descendants, the tax-free threshold for cash donations to relatives will be raised to as much as 30 million yen from October 2016, from the current 10 million yen. The money must be used to purchase real-estate to qualify, and the threshold will be reduced from October 2017.