Japan’s ruling coalition approved Friday a tax reform package for fiscal 2019 starting in April that gives consumers greater incentives to buy homes and cars in an attempt to underpin demand after a consumption tax hike slated for October next year.
Prime Minister Shinzo Abe’s Liberal Democratic Party and coalition partner Komeito signed off on a draft of the package, which will be the basis for legal revisions to be submitted to the ordinary Diet session beginning in January.
Economists have warned that raising the consumption tax from the current 8 percent to 10 percent could cause a large drop in demand, especially for big ticket purchases.
To prevent such a scenario, the ruling bloc said it will cut taxes on car ownership. People who purchase a new vehicle after the Oct. 1 tax hike will save between 1,000 and 4,500 yen ($9 and $40) a year, although trucks, minivehicles with engines no larger than 660 cc and second-hand cars will be ineligible.
As an additional temporary measure, a new one-time tax on car purchases will be lowered by 1 percentage point for a one-year period.
The duration of tax deductions for people with home mortgages will be extended from the current 10 years to 13 years. As is currently the case, homeowners will be able to deduct up to 500,000 yen from their annual payment of income and residential taxes for the first 10 years, while over the following three years they will be able to deduct 2 percent of the building’s purchase price.
Combined, these reforms will reduce tax revenue of central and municipal governments by as much as 167 billion yen.
LDP tax panel chief Yoichi Miyazawa on Friday touted the measures, saying they “will be able to soundly prevent a decline in demand.”
The previous consumption tax hike in 2014 caused a surge in spending beforehand and a sharp fall afterwards, causing the economy to contract just as it was beginning to recover after a decade and a half of deflation.
The Abe administration is also preparing more than 2 trillion yen in fiscal stimulus in the initial budget for the year beginning in April to prevent a repeat of that scenario, government sources have said.
The reforms also include a revision to the government’s “hometown tax” scheme, which allows taxpayers to make donations to the municipality of their choice and receive tax benefits.
The ruling coalition said it would place stricter guidelines on the gifts that cities and towns offer to attract potential donors.
Under the new guidelines, gifts — often consisting of agricultural products such as rice or meat — must be worth no more than 30 percent of the donation, and be produced within the municipality receiving the donation. Those that break this rule will be banned from the program from June.
The tax reform package’s unveiling on Friday came after a two-day delay due to some last-minute wrangling over supporting one-parent families.
Single parents who have never been married and have income below a certain level will receive cuts to residential tax as well as a 17,500-yen benefit a year on top of their current benefits.