Amid ongoing price hikes in Japan, it is necessary to ease tax burdens on people struggling with the high cost of living. On the other hand, if debt-ridden state finances are to be further aggravated, it will only leave behind problems for future generations. Both the ruling and opposition parties should debate the issue with due responsibility.

The ruling Liberal Democratic Party (LDP) and its coalition partner Komeito have approved their tax reform package for fiscal 2025. In response to a request by the opposition Democratic Party for the People (DPP) to raise the tax-free annual income threshold from the current 1.03 million yen (approx. $6,600), the controversial criterion will be pushed up to 1.23 million yen (about $7,900).

The tax-free yearly income threshold was introduced to guarantee the minimum standard of living. The threshold has been left unchanged since 1995 on the grounds of the country's prolonged deflation. Today, an increasing number of student part-timers are inevitably refraining from working long hours to avoid going over the threshold. It is reasonable that the ruling bloc has decided to raise the longstanding criterion.

However, the DPP, a staunch advocate to raise the threshold to 1.78 million yen (approx. $11,400), has not accepted the latest plan. The LDP-Komeito minority government is set to continue three-way talks on the issue alongside the DPP. This has marked an unusual development, with the possibility of the plan being amended in the Diet to be convened at the beginning of next year.

In focus will be whether the threshold will be further raised from the ruling camp proposal, yet the parties involved should not end up engaging in mere political maneuvering. They should reach a conclusion after clarifying the purpose and effects of their policy measures and challenges that need to be dealt with.

There is a wide divergence of opinion between the ruling bloc and the DPP.

The ruling camp's plan reflected the 20% inflation in food and other prices since 1995. If the plan is meant to make up for the rising cost of living, then it will be reasonable to raise the tax-free annual income threshold to a level commensurate with price hikes.

The DPP, on the other hand, is demanding that the threshold be raised by a little over 70%, the same as the rate of increase for the minimum wage. The party estimates that this will give a tax break of some 130,000 yen (roughly $830) to those earning 5 million yen (approx. $32,000) annually and a roughly 230,000 yen (about $1,470) tax break to those earning 10 million yen (around $64,000) per year. This plan is aimed at spurring consumption through large-scale tax reductions.

It is questionable, however, that the higher annual income people earn, the greater benefits they will get. It is essential to create a system to primarily support low-income earners who are hit hardest by price surges.

The DPP plan's effects on public finances cannot be overlooked, either. According to a government estimate, if the tax-free annual income threshold is raised to 1.78 million yen, national and local government tax revenue will decline by 7 trillion to 8 trillion yen (approx. $44.7 billion to $51.1 billion) per year.

While the DPP insists that its proposal will stimulate the economy and boost tax revenues, such an outlook is too optimistic. If the party is pushing the plan to win more seats in next summer's House of Councillors election, it should be called irresponsible. The ruling bloc should not accept the DPP plan as it is while leaving the issue of how to secure fiscal resources to make up for the tax revenue shortfalls behind.

This is an opportunity to review how tax discussions should unfold. In the previous LDP-dominated Diet, the bills submitted by the ruling bloc would be enacted, with Diet deliberations becoming a mere formality.

The tax issue, which deeply affects people's lives, should be discussed in the Diet from a broader perspective. The ruling and opposition camps should engage in exhaustive discussions to find reasonable common ground. It is about time the Diet carried out such careful deliberations.