Increasing the rates of taxation on financial income has become a point of contention in the Liberal Democratic Party’s presidential race. The aim is to generate more tax revenue from the wealthiest individuals who currently have a relatively low tax burden. Some members of the business community also support this idea. However, there is opposition from others in the business community, as demonstrated by Prime Minister Fumio Kishida’s decision to shelve a similar plan due to backlash from financial markets.
Shigeru Ishiba, former LDP Secretary General, has called for an increase in the tax rate as part of his campaign for the LDP presidential election. However, few other candidates seem to agree with him. Toshimitsu Motegi and Shinjiro Koizumi hold negative stances on this issue, with Motegi stating that tax increases are not the right policy direction and Koizumi arguing that it would dampen savings and investments.
Taro Kono and Takayuki Kobayashi also oppose increasing taxes on financial income. Chief Cabinet Secretary Yoshimasa Hayashi suggests carefully assessing the situation before making any further decisions.
When Kishida won the LDP leadership election in 2021 and advocated for higher taxation rates on financial income, it led to a six-day decline in stock prices known as the “Kishida shock,” resulting in his plan being shelved.
Ishiba clarifies that he does not intend to discourage investment through raising taxes on small investments like those covered by NISA tax exemption program.
Japan currently has a progressive income tax system where higher incomes are subject to higher tax rates. However, when it comes to financial income from stocks and mutual funds, there is a flat 20% tax rate regardless of income level. This means that wealthier individuals tend to have lower overall tax burdens since their proportion of income derived from stocks and mutual funds increases.
The issue of strengthening taxation on financial income has sparked debate within the LDP leadership race due to concerns about fairness within the current system.
According to data from Japan’s National Tax Agency’s 2022 Sample Survey for Self-Assessment Income Tax, individuals with total incomes over ¥3 million up to ¥5 million have a 3.9% tax burden rate while those earning over ¥50 million up to ¥100 million experience an increasing burden rate peaking at 26.3%. For those earning more than ¥100 million annually, their average burden rate is 22.5%.
Takeshi Niinami from Keizai Doyukai supports a high tax rate (upwards of 25%) on financial income as long as it doesn’t hinder asset management flow but emphasizes that serious discussions among LDP presidential candidates are necessary regarding this matter.
On another note, Hajime Yoshimoto from Nomura Securities Co., warns about potential concerns raised by businesses and financial markets regarding how increased taxes could impact middle-class investment returns.
