Japan's ruling bloc endorses draft reform focusing on tax breaks for wage hikes

© Reuters. FILE PHOTO: Japan's Prime Minister Fumio Kishida speaks to media at his official residence in Tokyo, Japan November 24, 2021. Mandatory credit Kyodo/via REUTERS/File Photo

By Tetsushi Kajimoto and Kaori Kaneko

TOKYO (Reuters) -Japan's ruling party approved a draft tax plan on Thursday that rewards businesses that raise wages but shied away from ambitious reforms around climate change or capital gains, two key policy issues for Prime Minister Fumio Kishida.

The government will "comprehensively consider" capital gains tax reforms and look at ways to fight tax evasion in derivatives trading, a final draft plan for the next fiscal year obtained by Reuters showed, but it did not provide policy specifics.

The draft, which was set for formal approval by the ruling Liberal Democratic Party (LDP) and its coalition ally Komeito on Friday, also called for "technical consideration" of a policy mix that achieved carbon neutrality, but stopped short of any reference to a "carbon tax".

"There's no big game changer in next year's tax reform plan," said Takuya Hoshino, senior economist at Dai-ichi Life Research Institute.

"The financial tax reform debate did not make headway due to concerns about its impact on stock market at a time of the coronavirus shock. And carbon neutrality talks faced stiff resistance from business circles worried about potential burdens," he said.

The draft noted income tax burdens tended to be lower among high-income earners due to a higher share of financial income.

It said that situation needed to be corrected and that fairness needed to be considered when looking at taxation on financial income.

"We will conduct comprehensive consideration by taking into account systems in other countries and their market impact while ensuring a sound environment for ordinary investors," it said.

As a result, the fiscal 2022 tax reform has focused more on tax breaks for companies that raise wages.

Japan will deny some tax breaks to companies that do not hike wages while boosting deductions for those that do, using the carrot-and-stick approach that underscores Kishida's focus on distributing more wealth to households.

The premier has piled pressure on firms to raise wages, urging pay hikes of 3% or more for firms whose profits have returned to pre-pandemic levels.

But analysts doubt one-off tax deductions will prompt cautious Japanese firms to move to increase fixed labour costs.

"Wage levels have stayed almost flat over 30 years, while investment on human capital and intangible assets has paled in comparison to other advanced countries," the draft said.

"On the other hand, shareholder returns and internal reserves remain in uptrend even in the face of the coronavirus."

The tax panel has also agreed to tweak tax breaks on mortgages in another key reform for the next fiscal year.