Defense Tax Increase Begins Targeting Corporate Tax and Tobacco Tax
Japan's Liberal Democratic Party (LDP) and its coalition partner, the Komeito Party, will raise the non-taxable threshold for earned income tax from the current annual income of 1.03 million yen (approximately 9.51 million KRW) to 1.23 million yen (approximately 11.36 million KRW) next year.
According to Kyodo News and Nihon Keizai Shimbun (Nikkei) on the 20th, the LDP and Komeito decided on the 2025 ruling party tax reform outline, which includes tax increases to fund defense spending. An LDP official predicted that the "improvement of the 1.03 million yen wall" would reduce tax revenue by about 600 to 700 billion yen (approximately 56 to 65 trillion KRW).
The so-called "improvement of the 1.03 million yen wall," which means raising the non-taxable threshold for earned income tax, has been strongly advocated by the third opposition party, the Democratic Party for the People. After failing to secure a majority in the general election at the end of October, the LDP and Komeito have been discussing this issue with the Democratic Party for the People, with whom they have formed a policy cooperation alliance.
Initially, the Democratic Party for the People demanded a significant increase in the non-taxable threshold for earned income tax to 1.78 million yen (approximately 16.44 million KRW), but the ruling parties insisted on 1.23 million yen due to concerns about a sharp decline in tax revenue.
If the non-taxable threshold for earned income tax rises to 1.23 million yen, not only low-income earners but also those with an annual income of 8 million yen (approximately 74 million KRW) will see their income tax reduced by 20,000 yen (approximately 185,000 KRW).
Additionally, the ruling parties decided to raise the specific dependent deduction condition, which reduces the tax burden for parents with children aged 19 to 22, from an annual income of 1.03 million yen or less to 1.5 million yen (approximately 13.9 million KRW) or less for the children.
However, the tax increases to fund defense spending will start from April 2026, targeting corporate tax and tobacco tax. The tobacco tax hike will first apply to electronic cigarettes, which currently have a lower tax rate than conventional cigarettes, and will later be extended to all tobacco products. The timing for increasing income tax, which was also mentioned as a potential tax increase item, will be decided later.
The tax reform plan set by the ruling parties will be finalized by the government through a cabinet meeting and submitted to the regular Diet session next year.
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