TOKYO – Japan on Wednesday raised tobacco and corporate taxes to finance a boost in defense spending, with income tax hike set to follow in 2027 as the government projects the tax increases will add some 1.3 trillion yen ($8 billion) annually in revenue.
As the security environment surrounding Japan deteriorates and the government is set to further beef up the country’s defense capabilities, the public is likely to face further tax burdens to finance the defense outlays, which have now ballooned to a record-high 9 trillion yen a year.
From Wednesday, the government added a surtax of 4 percent after deducting 5 million yen from the corporate tax amount. The measure, estimated to raise tax revenues by 869 billion yen, will exclude small and midsize businesses with small incomes.
For heated tobacco products, the government is implementing a two-stage tax hike starting Wednesday and again from October, aligning them with the rate for conventional cigarettes, which is currently higher.
It will then raise the tax rate for both heated and conventional cigarettes from April 2027 in three stages, hiking it by 0.5 yen per stick. The increases are set to expand tax revenues by 212 billion yen.
As for income tax, the government will charge an extra 1 percent from January 2027 to secure 256 billion yen.
However, that increase will be offset by a 1 percent reduction in a special income tax currently levied at a rate of 2.1 percent to fund reconstruction efforts following the March 2011 earthquake and tsunami disaster.
But the total financial burden on the public will ultimately grow as the taxation period for the special income tax for reconstruction will be extended.
The series of defense-related tax increases was decided in response to a new security strategy compiled in December 2022 that includes a plan to cover 1 trillion yen annually by hiking taxes.
A record-high 9 trillion yen was earmarked for defense spending for fiscal 2026, which marks the fourth year of Japan’s five-year 43-trillion-yen defense buildup plan.
Takaichi has been eager to raise defense and related spending, vowing to revise three security documents by the end of this year.
Under Takaichi’s government, Japan brought forward its goal of raising defense spending and related initiatives to 2 percent of gross domestic product by two years, to fiscal 2025.
The United States, its key security ally, may also press Tokyo to boost defense spending after urging allies and partners in its national defense strategy document released in January to increase such outlays to 5 percent of their GDP.
Before Japan drafted its five-year defense buildup plan, the annual defense budget had long been capped at around 1 percent of GDP, or roughly 5 trillion yen.