Analysts skeptical of effect of Japanese tax breaks on wage increases

Japan’s ruling coalition on Friday approved a tax reform plan for fiscal year 2022 that will see an expansion of efforts to encourage businesses to raise wages in line with Prime Minister Fumio Kishida’s policy of pursuing wealth redistribution. households and economic growth.

But many analysts predict that the effect of tax breaks for companies aimed at raising the base salaries of their employees is likely to be limited.

Prime Minister Fumio Kishida attends a plenary session of the House of Councilors in Tokyo’s parliament on December 9, 2021. (Kyodo)

They believe that the planned tax deductions will be non-permanent and insufficient to change the course of wages in Japan, which have been almost stable for the past 30 years, arguing that more needs to be done, such as rolling out a measure designed to improve the productivity of the work if the government takes its political objective seriously.

“Given that the tax cuts are temporary, I think the policy is unlikely to drive up wages, especially base wages, which will increase fixed costs for businesses,” Koya said. Miyamae, Senior Economist at SMBC Nikko Securities Inc.

Kishida, who took office in early October and led the Liberal Democratic Party to victory in a general election at the end of the month, pledged to revive the economy hit hard by the coronavirus pandemic by redistributing the wealth to the middle class through wage increases.

Increasing tax incentives for companies that raise wages was among the LDP’s campaign promises in the lower house election, although no details were available at the time.

As part of the planned reform of the tax system, large companies that increase annual salaries by more than 3% compared to the previous year will be able to benefit from corporate tax deductions of up to 30%, compared to 20 % currently.

The maximum deduction rate for small businesses will increase from 25% to 40%. For large and small businesses, the deductions will apply to their year-over-year salary increases.

Eligibility requirements for the carrot-and-stick tax policy will be tougher for large companies, which must increase wages by at least 3% for all employees, except new hires, instead of 2% for new employees under the current system.

The policy will be interim, applicable only for two years beginning in fiscal year 2022 beginning in April.

“For companies that were considering a pay rise, the tax benefit is indeed a blessing, so I wouldn’t say the policy has no effect. But from a national finance perspective, maybe it’s a waste,” says Miyamae.

The annual tax reform plan will be submitted to the Diet early next year, after securing Cabinet approval later this month.

In late November, Kishida told a meeting of government experts that he hopes companies that see profits return to pre-pandemic levels will raise employee wages by “more than 3%” next spring. .

It was extraordinary that the LPD-led government, which has been demanding a wage increase since 2013, mentioned a specific numerical target.

In addition, the government has promised to increase the monthly salaries of social workers, nursery school staff and nurses by 1-3% from current levels.

Business leaders seem to have taken Kishida’s policy positively.

Yoichi Miyazawa (right), head of the ruling Liberal Democratic Party’s tax commission, and his counterpart Makoto Nishida of junior coalition partner Komeito pose for a photo on December 10, 2021 at parliament in Tokyo. (Kyodo)

In a survey conducted in mid-November by Teikoku Databank Ltd., 802, or 48.6%, of the 1,651 companies that responded said they would raise wages regardless of the size of the tax breaks.

If tax incentives were to be expanded, 8.5% of firms said they would raise wages and 22.3% said they would consider raising them. If those two numbers were added, “79.4% of the total were positive” about salary increases, the credit research firm said.

Miyamae expects more companies than before to apply for the tax cuts for the wage increase as business activities gradually resume as the number of new COVID-19 cases remains low in Japan.

“Amid the recovery in business, the long-standing labor shortage on the back of the country’s aging population has become serious again,” he said.

Japan has long experienced no significant wage growth. Its average annual income in purchasing power parity was $38,515, up 0.4% in the 20 years to 2020, while those in the industrialized countries of the Group of Seven averaged $49,642. dollars, up 14.3%, according to data from the Organization for Economic Co-operation and Development.

A number of economists cite Japan’s low productivity as a key reason for decades-old wage stagnation, with OECD data showing gross domestic product per hour worked at $48 for the Japan last year, remaining the worst among G-7 countries.

“Companies can raise wages because their profits and productivity are rising. It is unreasonable to try to raise wages while productivity remains low,” said Hideo Kumano, executive chief economist at Dai-ichi Life Research. Institute.

To boost wages, Kumano said, the government’s economic stimulus should include more measures that would help small and medium-sized businesses improve productivity and boost exports.

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Japanese gov’t lays out fiscal 2022 tax plan focused on raising salary incentives

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