Update: LDP Concedes to DPFP On Raising Tax-Free Income Bracket

How Much Still To Be Decided

See chart and explanation is previous post

After days of resistance, the ruling coalition of the Liberal Democratic Party (LDP) and Komeito surrendered to the demand of the Democratic Party for the People (DPFP) to raise the tax-free income bracket above its current level of ¥1.03 million ($10,000 in Purchasing Power Parity dollars; PPP is the rate that would describe equal living standards). The revised agreement also included the phrase “increase take-home pay,” the principal plank in the DPFP’s campaign platform.

            While the DPFP had proposed a hike to ¥1.78 million, the three-party agreement said the exact amount would be decided in negotiations over next year’s budget. The Diet would have to approve the change in the ordinary session that begins in January. Typically, the main outline of the budget and tax reform proposals are decided in December.

            The DPFP won a commitment to some rise in the tax-free bracket by saying it would refuse to vote for the supplementary budget later this year unless the two ruling parties agreed to this concession. The two parties, on their own, lack the votes to pass a budget.

            The LDP will likely resist hiking the tax-free bracket all the way to ¥1.78 million since that would cost the national and local governments an estimated ¥7-8 trillion. Some local and prefectural governments have openly opposed the hike on these grounds. On the other hand, 90% of the 1,700 employers surveyed by Teikoku Databank said they support raising the threshold because they think it would help overcome the labor shortage. As I explained in the previous post, the threshold causes millions of non-regular workers to limit their hours of work.

            Had the LDP kept its majority in the Lower House, it’s hard to imagine it would have agreed to a permanent tax cut for households. At most, it would have implemented some one-time giveaways, some of which are included in the proposed supplementary budget.

            See my previous post for the ramifications of this agreement for long-term political and economic reform. The impact will depend on how much the government raises the tax-free bracket, along with associated reforms that the net income drop seen in the chart at the top.