Japan Steps Closer to Cutting Income Tax Amid Recession

Japan’s policymakers appear set to propose an income-tax cut to deal with an economy on the verge of a recession, but it may not turn out to be the ace in the hole.

With the latest data painting gloomier pictures of the economy, officials of the ruling Liberal Democratic Party have said they may resort to a tax cut to spur consumption, seen as a key factor in turning around the sluggish economy.

“The important thing is what steps we should take to boost consumption. Consumption is certainly declining. We will deal with the current state of the economy with a sense of crisis,” Koichi Kato, Liberal Democratic secretary-general, told lawmakers Friday.

The LDP is now working out the details of a $119-billion economic package it unveiled last month and is widely expected to incorporate some form of an income-tax cut.

But financial analysts say promises of tax cuts alone will not prove a magic fix for Japan’s economy.

“People have lost confidence in the future and when you think your job is not assured, you don’t spend money,” said Kazuo Nukazawa, senior managing director at the business lobby Keidanren, or Federation of Economic Organizations.

Economists also said any income-tax cut may give the overall economy only a limited boost.

Yasuhiko Ushikubo, senior economist at the Industrial Bank of Japan said a previously announced tax rebate package will push up Japan’s gross domestic product, the broadest measure of the economy, by a scant 0.1% or 0.2% at most.

The government’s Economic Planning Agency has also said tax cuts have only a limited impact on the economy.

The Nikko Research Center said a combination of tax cuts are necessary, including lowering the maximum rate of income tax from 50% to 40% and slicing the effective rate of corporate tax from 46.4% to 40%.

Nikko Research said such steps would act as an incentive for many companies and invigorate the economy.

Ushikubo also said a comprehensive review of the tax system is needed, adding that consumers would refrain from spending on fears of a future tax rise even if taxes are cut now.

Analysts said consumer sentiment is also suffering as a result of lawmakers’ hints that the national sales tax would be raised to pay for income-tax cuts.