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Economy

Quick expiration date could hobble Japan's 'wage hike' tax cuts

3% raises needed to qualify could be a stretch for many companies

Liberal Democratic Party tax chief Yoichi Miyazawa, center, presents the ruling bloc's tax plan.

TOKYO -- Japan's new tax incentives for businesses that bulk up pay and investment are set to last just three years and could prove difficult to qualify for, casting doubt on whether the measures can jump-start the economy as lawmakers hope.

Under fiscal 2018 tax overhaul plans approved Thursday by the ruling coalition, effective rates could fall from the statutory 29.74% to around 25% for major companies that lift pay 3% or more on the year as the government will refund a portion of the pay raises. Rates could be further reduced to about 20% through also investing in productivity growth.

Around a fifth of profit-making companies are eligible for these incentives. But whether they will take them is another matter.

The 3% threshold is a tough hurdle to clear. The government, the Japan Business Federation and the Japanese Trade Union Confederation are all calling for 3-4% raises at this coming spring's wage talks. But there is reason to believe that this may not translate into real, lasting increases.

"We want to improve compensation for our workers, but raising pay 3% will be extremely difficult," said Sumito Kawano, president of supermarket operator Yaoko.

President Yoshiaki Yoshida of Advantest had similar concerns, saying the maker of chip-testing equipment "is not considering changing wages to match changes in the tax system."

Raising regular pay is not the only way to meet the 3% level. Increased bonuses and certain benefits fit the bill as well. But while some companies with strong earnings may fatten bonuses to qualify for the breaks, this "would not lead to base-wage increases, which entail permanent fixed costs," according to Koya Miyamae, senior fiscal policy analyst at SMBC Nikko Securities.

Why bother?

After the pay raise comes the investment hurdle. "The tax cuts will help a good deal with expanding reinvestment," said Masataka Yamaishi, president of Yokohama Rubber, adding that the tire maker has a "positive view" of the plan overall.

Investments in labor-saving technology have become imperative for many businesses struggling to raise output amid Japan's severe personnel shortage. Major enterprises, in particular, thus could benefit from the plan in the end.

On paper, so should smaller companies, which must increase compensation just 1.5% to qualify for benefits. But the complexity of the tax code will likely keep them from taking full advantage of the changes. "The screening process is tough, and it will still be mostly large companies that see their taxes fall," said Takafumi Takada, head of tax practice at the Torikai Law Office in Tokyo.

Moreover, the plan would keep these incentives in place for only three years. "It's hard to imagine companies will be eager to hike wages when they don't know what could change three years down the road," said Masahiro Nishikawa, chief fiscal policy analyst at Nomura Securities.

Reducing taxes to offset the increased burden to companies increasing pay will not make companies stronger in any real sense, argued George Nakayama, chairman of drugmaker Daiichi Sankyo. Unless the breaks are combined with measures to bolster economic growth and make Japan more competitive as a location for business in the long term, their impact will not be large enough, he said.

As the U.S. moves to slash corporate tax rates, Japan may be forced into a more drastic cut. Japan's statutory corporate rate is slated to drop slightly to 29.74% in fiscal 2018. But a tax plan that could soon become law in the U.S. would cut the federal corporate income tax rate from 35% to 21%. Even in such high-tax states as California, the total burden is seen decreasing from more than 40% to 28%. France, too, plans to gradually lower the corporate rate from 33.33% starting next year, bringing it to 25% by 2022.

The short end of the stick

The corporate tax changes will ultimately prove roughly revenue-neutral, thanks to measures restricting access to other breaks by companies that do not raise pay appropriately. But individuals are expected to pay more, boosting net tax revenue 280 billion yen ($2.48 billion) in the average year once all measures have been implemented. Households' annual disposable income stands to fall around 70 billion yen, according to Takuya Hoshino, deputy chief economist at the Dai-Ichi Life Research Institute.

The 4% of workers making more than 8.5 million yen a year will see their income taxes rise under the plan, adding 90 billion yen in revenue. While basic deductions for all will increase by 100,000 yen to encourage more diverse work styles, employment income deductions will shrink by the same amount for earners making less than 8.5 million yen and be capped at 1.95 million yen for those making more. Deductions for public pension income will also be cut for those receiving high payouts.

Taxes on tobacco will be raised for the first time in eight years starting in October 2018, adding around 240 billion yen in annual revenue when the increase takes full effect. A 1,000 yen exit tax on travelers leaving Japan will bring in an annual 40 billion yen after it takes effect in January 2019.

Yoichi Miyazawa, head of the ruling Liberal Democratic Party's tax research body, defended the income tax hike at a news conference Thursday, saying the plan will "gain public understanding." He suggested that more comprehensive revisions to the income tax system, including changes to the employment income deduction and a larger basic deduction, could be considered as early as fiscal 2019.

(Nikkei)

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