Japan’s tax system reform has always been one of the key means to promote national economic development and address fiscal challenges. Against the backdrop of changes in the global economic environment and domestic aging issues, the government, through a series of tax adjustment policies, not only attempts to solve the fiscal deficit problem but also aims to stimulate corporate innovation, enhance household consumption capacity, and promote green economic transformation. Every adjustment in tax reform has a profound impact on both corporate and individual levels, therefore, analyzing the background, trends, and impacts of annual tax system reforms is of great significance.

Overview of Japan’s Annual Tax System Reform

1.1 Background and Importance

Japan’s tax reform plays a crucial role in the context of globalization and changes in domestic economic structure. First, the necessity of tax reform stems from Japan’s fiscal deficit and population aging issues. According to the “Fiscal Stability Act” and the “Social Security and Tax System Integration Reform Act”, the Japanese government’s long-term goal is to address the growing fiscal deficit through increased tax revenues and spending cuts. As Japan’s national debt to GDP ratio has exceeded 240%, one of the highest in the world, the government must adopt a series of tax policies to ensure fiscal sustainability. Meanwhile, population aging has led to a sharp increase in social security expenditures, such as medical care and pension insurance, further increasing the fiscal burden. Therefore, tax reform is one of the key means to alleviate this crisis.

In addition, Japan’s tax reform is also influenced by the global economic and international competitive environment. The rapid changes in the global economy, especially the development of digital transformation and green economy, require Japan to adjust its tax policies to enhance its competitiveness in these areas. For example, as the international community’s attention to climate change issues increases, Japan has introduced more environmentally friendly tax policies through tax reform to encourage enterprises to transition to a green economy. Furthermore, the rise of the digital economy has posed challenges to traditional tax models, and the government needs to reasonably address tax collection and management issues in cross-border e-commerce, digital services, and other fields through tax reform.

Overall, the importance of Japan’s tax reform lies not only in solving short-term fiscal deficits and population aging issues but also in providing policy support for long-term sustainable economic development. Tax reform will affect Japan’s fiscal health, social equity, and economic structure transformation, thus having far-reaching strategic significance.

1.2 Overall Trends and Government Objectives of Annual Tax System Reform

Annual tax system reform is an important policy tool adopted by the Japanese government to respond to changes in domestic and international economic situations, optimize tax structure, and balance fiscal revenue. From an overall trend perspective, Japan’s tax reforms in recent years have mainly focused on three aspects: adjusting tax structure, promoting corporate innovation and green economic development, and narrowing the wealth gap.

First, adjusting the tax structure is one of the core tasks of Japan’s tax reform. The government tries to reduce excessive reliance on corporate and labor income by raising consumption tax and expanding the tax base, and instead increase taxation on consumption and capital gains. According to the “Japanese Consumption Tax Law”, since 2019, Japan has raised the consumption tax rate to 10% to increase fiscal revenue, while protecting basic consumer goods and services, such as food and pharmaceutical products, through low tax rates or tax exemption policies to reduce the burden on low and middle-income groups. This tax rate adjustment aims to ensure the continuity of social security expenditures and reduce the pressure on corporate and individual income taxes.

Secondly, one of the government’s objectives is to promote corporate technological innovation and environmental transformation through tax reform. According to the “R&D Investment Tax Incentives Act” and the “Green Economy Development Plan”, the government has expanded tax credit policies for corporate R&D investments in annual tax reforms, especially for investments in green technologies, renewable energy, and digital transformation fields, which enjoy higher tax reductions. This trend reflects the government’s emphasis on economic structural transformation, aiming to enhance the competitiveness of Japanese enterprises in the global market while addressing global challenges such as climate change.

Furthermore, narrowing the wealth gap has also been a focus of Japan’s tax reforms in recent years. According to the amendments to the “Income Tax Law”, the tax burden on high-income groups has gradually increased, especially in the adjustment of capital gains tax and dividend tax. The government has further increased taxation on high-income earners through progressive tax rates and reducing tax deductions. At the same time, by increasing tax deductions and social welfare expenditures for low and middle-income groups, the government attempts to achieve a fairer income distribution.

Overall, the general trend of annual tax system reform can be summarized as adjusting tax structure, supporting innovation and green economic development, and promoting social equity. These measures not only meet the needs of Japan’s domestic economic structure transformation but also help enhance Japan’s position in global competition. The government’s long-term goal is to ensure sustainable economic growth through tax reform while maintaining fiscal health and social stability.

Main Changes in Annual Tax System Reform

2.1 Personal Income Tax Reform

In the annual tax system reform, personal income tax reform is one of the key points, mainly focusing on adjustments to tax rate brackets and new tax deduction policies. According to the “Japanese Tax Law”, Japan’s personal income tax adopts a progressive tax rate, and the adjustment of tax rate brackets mainly reflects in expanding the range of tax deductions for low and middle-income groups. For example, taxpayers with annual incomes below 5 million yen can enjoy more basic deductions. This measure aims to reduce the tax burden on low and middle-income earners, encourage household consumption, and thereby promote economic growth.

At the same time, newly added tax deduction policies further strengthen support for specific groups, such as families with children, elderly care families, and groups with high medical expenses. According to the 2023 tax reform plan, the deduction range for childcare expenses has been expanded, and the deduction amount for each child has also increased. In addition, for medical expense deductions, taxpayers can enjoy tax deduction policies as long as their personal medical expenses exceed a certain percentage of their annual income. The introduction of this policy helps to increase family investment in children’s education and health, and indirectly drives the growth of related service industries.

However, the impact on high-income groups is more significant. The tax reform further strengthens the taxation on high-income earners with annual incomes exceeding 20 million yen, increasing the threshold for the highest income tax rate, with the highest rate being 45%. This move aims to achieve income redistribution, fill fiscal gaps, and comply with the basic principles of the “Japanese Tax System Fairness Act”. At the same time, certain tax deductions for high-income earners, such as deductions for donations and capital gains, have also been partially limited to increase the tax burden on high-income earners. These policies significantly increase the tax burden on high-income groups, helping to reduce the wealth gap, but may have some negative impact on the consumption and investment behavior of high-income earners.

2.2 Corporate Tax Reform

The adjustment of corporate tax in the annual tax system reform, especially preferential policies for small and medium-sized enterprises, is another important content of this reform. According to the provisions of the “Corporate Income Tax Law”, the corporate tax rate remains unchanged, but the special preferential policies for small and medium-sized enterprises have been further expanded. For enterprises with annual incomes below 1 billion yen, the income tax rate has been reduced from 23.2% to 15%. This measure is mainly to reduce the tax burden on small and medium-sized enterprises, encourage entrepreneurship and the development of SMEs, especially in the critical period of post-pandemic recovery, where SMEs are crucial for the restoration of economic vitality.

In addition to the reduction in tax rates, this tax reform has also expanded the tax incentives for R&D investments. According to the “R&D Investment Incentive Act”, enterprises can enjoy tax credits for their R&D investments, especially in strategic areas such as high-tech and green energy. By increasing the deduction ratio of R&D expenses, the government hopes to further encourage enterprises to increase investment in technological innovation and enhance the competitiveness of Japanese enterprises in the global market. In 2023, the upper limit of the R&D expense tax credit was raised to 25%, and the scope of application was expanded to cover more SMEs and emerging industry enterprises. This move not only helps improve the technological level of enterprises but also provides necessary support for the overall economic transformation and upgrading of Japan.

2.3 Changes in Consumption Tax

In the 2023 tax system reform, the consumption tax rate remains at 10%, but adjustments have been made to consumption tax policies for certain industries. According to the “Consumption Tax Law”, food, daily necessities, and some public services still enjoy lower tax rates, while luxury goods and high-end services continue to apply the standard tax rate. Specifically, the catering industry, retail industry, and hotel industry are among the most affected industries. Although the overall tax rate remains unchanged, changes in the reporting and collection system require these industries to make internal adjustments to adapt to new regulatory requirements.

The service industry, especially the retail and catering industries, faces more compliance challenges due to the complex consumption tax reporting process. The 2023 “Consumption Tax Reporting Reform Act” stipulates that all enterprises subject to consumption tax must adopt a standardized electronic reporting system. This policy aims to improve tax collection and management efficiency and reduce the risk of human error in reporting. The new system requires all retail and service enterprises to report according to detailed tax rate classifications, making corporate financial management more complex, but helping to improve overall tax transparency and fairness.

2.4 Changes in Capital Gains Tax and Dividend Tax

In terms of the capital market, there have also been corresponding adjustments to capital gains tax and dividend tax. In the 2023 tax system reform, the capital gains tax maintained a basic rate of 20.315%, but additional tax incentives were given for long-term capital investments. According to the “Capital Market Taxation Law”, for capital investments held for more than 5 years, the tax rate can be reduced to 15% to encourage long-term investment behavior and reduce short-term speculation. This policy adjustment aims to stabilize the capital market and encourage investors to make long-term capital allocations.

In terms of dividend tax, the adjustment mainly focuses on high-income groups. For individual shareholders with annual incomes exceeding 20 million yen, the tax rate on their dividend income has been increased to 25%. This move is to increase government fiscal revenue while also prompting high-income groups to adjust their investment portfolios. At the same time, new investment tax incentive policies are also reflected in this reform. The government provides additional tax deduction policies for investments in certain specific areas (such as green energy, technological innovation), aiming to guide more funds into industries that conform to national strategies.

2.5 Reform of Real Estate Related Taxes

The adjustment of real estate taxation is also one of the key areas of the 2023 tax system reform. According to the “Real Estate Tax Law”, both real estate transaction tax and holding tax have changed. The real estate transaction tax rate has been adjusted by grade according to property type, especially for commercial real estate, where the tax rate has been increased to reduce excessive commercial real estate speculation. The government hopes to stabilize the real estate market and prevent overheating speculation by increasing transaction taxes.

In addition, the reform of real estate holding tax focuses on increasing the holding costs of high-end housing and multiple properties. According to the new policy, the tax rate for holding residential properties valued over 100 million yen has been increased from 1.7% to 2.2%. This policy will have a direct impact on real estate investors, especially those holding multiple properties who will face a higher tax burden. At the same time, the government has also strengthened tax supervision on idle properties, further increasing the tax cost of holding idle properties to promote the effective use of real estate.

Analysis of Industry Impact of Tax System Reform

3.1 Manufacturing Industry

The impact of the annual tax system reform on the manufacturing industry is mainly reflected in changes in corporate tax rates and the strengthening of R&D investment incentive policies. According to the 2023 amendments to the “Corporate Income Tax Law”, while the corporate tax rate remains unchanged, preferential policies for small and medium-sized manufacturing enterprises have been significantly expanded, especially in terms of R&D investment incentive policies. This policy change has had a noticeable impact on the costs of the manufacturing industry. For large and medium-sized manufacturing enterprises, the stability of the corporate tax rate means they will not face excessive tax shocks in capital expenditures and long-term planning, maintaining the predictability of corporate finances. However, for small and medium-sized enterprises, the expansion of tax incentives significantly reduces their tax burden, allowing these companies to invest more in raw materials and production equipment, enhancing their market competitiveness.

The expansion of R&D investment incentive policies is one of the key factors driving innovation in the manufacturing industry. According to the “R&D Investment Tax Incentives Act”, the tax credit ratio for R&D expenses increased to 25% in 2023 and covers more technological innovation areas, especially technologies related to carbon neutrality, green energy, and digital transformation. This policy adjustment encourages manufacturing enterprises to increase R&D investment, especially in industries such as automotive, electronic equipment, and high-tech manufacturing. Through tax incentive policies, it reduces the R&D costs for enterprises, thereby promoting the development of new products and technologies. Taking the automotive manufacturing industry as an example, the increased tax incentives for new energy vehicle technology R&D have reduced the financial pressure on enterprises in independently developing electric vehicles, hydrogen vehicles, and other areas, thus accelerating the technological upgrade and global competitiveness of the manufacturing industry.

3.2 Service Industry

The service industry is one of the sectors most affected by the consumption tax adjustment. The 2023 tax system reform maintained the consumption tax rate at 10%, but made detailed adjustments to tax policies for different consumer goods and services. According to the “Consumption Tax Law”, daily necessities such as food and medicine still enjoy lower tax rates, while luxury goods and high-end services continue to apply the standard tax rate. For service industry enterprises, especially in the catering and retail sectors, the tax system reform has brought direct operational cost impacts.

The retail and catering industries must readjust their pricing strategies and financial statements due to the consumption tax adjustment. In the catering industry, the tax rate structure for takeaway and dine-in services differs, with takeaway applying an 8% tax rate while dine-in applies a 10% rate. This difference requires catering businesses to conduct more complex management in pricing and tax reporting. For the retail industry, especially in the sale of high-end goods, businesses must consider the cost increase brought by the consumption tax hike, particularly in the sale of international luxury brands, where the elasticity of consumer demand to consumption tax is relatively high, potentially leading to a decline in sales of high-end goods.

Furthermore, the “Consumption Tax Reporting Act” requires all service industry enterprises to adopt a standardized electronic reporting system, increasing the tax reporting compliance of businesses. The implementation of this system not only reduces manual errors but also improves overall tax collection and management efficiency, although it may pose some financial and technical pressure on small and medium-sized enterprises in the short term.

3.3 Real Estate and Construction Industry

The real estate and construction industry has been impacted in multiple ways by this tax system reform, especially with real estate-related tax adjustments having far-reaching effects on developers and investors. According to the revised “Real Estate Tax Law” of 2023, tax rates for real estate transactions and property holdings have increased, particularly for commercial properties and high-end residences. The transaction tax for commercial real estate has risen from 2.5% to 3.5%, a policy aimed at reducing speculative behavior in commercial real estate and curbing market overheating. Additionally, adjustments to property holding taxes have strengthened tax management for high-end residences, with the holding tax for residences valued over 100 million yen increasing from 1.7% to 2.2%, intended to promote more rational market pricing by increasing the holding costs of high-value properties.

This policy adjustment has brought significant financial pressure to real estate developers. When planning commercial real estate projects, developers now face not only higher transaction costs but also need to consider the tax pressure during the holding phase, potentially leading to extended development times or reduced investment scales for some projects. At the same time, real estate investors, especially those holding multiple properties, will face higher holding costs, causing some investors to sell properties, which may affect the supply-demand balance in the real estate market in the short term.

In the construction industry, changes in corporate tax policies have brought new opportunities to this sector. Small and medium-sized enterprises in the construction industry can enjoy more tax incentive policies, especially with expanded tax incentives in sustainable building and green construction technologies. According to the “Green Building Incentive Policy,” construction companies can receive tax deductions for investments in energy-saving and environmentally friendly projects, which not only helps improve the environmental technology level of enterprises but also promotes the development of the construction industry towards low-carbon and sustainable directions.

3.4 Finance and Investment Industry

The main adjustments in the finance and investment industry in this tax system reform are reflected in changes to capital gains tax and dividend tax. In the 2023 tax system reform, although the basic rate of capital gains tax remains at 20.315%, the government has provided additional tax incentives for long-term capital investments. According to the “Capital Market Tax Incentive Law,” for investments held for more than 5 years, the capital gains tax rate will be reduced to 15%. This policy aims to encourage investors to reduce short-term speculative behavior and promote more long-term capital input into the stock market and financial markets.

This policy has had a positive impact on investors, especially individual investors and institutional investors. When planning investment portfolios, investors can reduce tax expenditures by extending holding periods, thereby optimizing investment returns. The implementation of this policy is expected to help stabilize the Japanese capital market, reduce short-term volatility, and promote healthy development of the stock market.

Changes in dividend tax mainly focus on high-income individuals and institutional shareholders. According to the newly revised “Dividend Tax Law,” individual shareholders with annual incomes exceeding 20 million yen will see their dividend income tax rate increase from 20% to 25%. This adjustment has a significant impact on the dividend income of high-net-worth investors, potentially prompting these investors to shift towards other low-tax or tax-exempt investment areas such as real estate or funds. At the same time, the adjustment of dividend tax may also have some capital outflow effects on Japan’s financial market, especially weakening its attractiveness to foreign investors.

Overall Impact of Tax Reform on the Economy

4.1 Impact on Domestic Economic Growth

The annual tax system reform has a significant impact on Japan’s domestic economic growth, especially in the context of post-pandemic economic recovery, where tax policy adjustments directly relate to the country’s economic vitality and sustainable development. Firstly, the potential impact of tax reform on GDP is reflected in how tax policies incentivize household consumption and business investment. According to adjustments in the “Japanese Tax Law,” personal income tax reductions and corporate tax incentive policies help increase domestic consumption levels and investment willingness. By reducing the tax burden on low and middle-income families, the government hopes to stimulate domestic demand, increase household disposable income, and thus drive consumption. As consumption is a major component of Japan’s GDP, accounting for about 60%, this policy has played a positive role in overall economic growth.

Moreover, corporate tax reform has had a noticeable stimulating effect on investment in manufacturing and service industries. The adjustment of corporate tax rates, especially tax reduction policies for small and medium-sized enterprises, has significantly reduced operational costs for businesses. According to the revised content of the “Corporate Income Tax Law,” companies with annual revenues not exceeding 1 billion yen enjoy lower tax rates, providing more room for innovation and expansion of small and medium-sized enterprises. The expansion of tax incentives for R&D investment, especially incentive measures in green technology and digital transformation, has promoted continuous investment by companies in technology and products. Data shows that capital investment in Japan’s manufacturing industry has grown by about 3% year-on-year, closely related to the government’s tax incentive policies.

4.2 Impact on Fiscal Revenue

Tax system reform has a direct impact on government fiscal revenue. Although short-term tax revenue may be reduced through personal income tax and corporate tax reduction policies, the government compensates for this gap by adjusting other types of taxes. For example, consumption tax, as an important source of Japanese tax revenue, maintains a rate of 10% and has been refined for specific industries. This policy ensures fiscal revenue while controlling the tax burden on low-income groups. In addition, adjustments to capital gains tax and dividend tax for high-income individuals and institutional investors increase tax rates to generate additional fiscal revenue. These adjustments provide additional revenue sources for the government while reducing personal income tax and corporate tax revenue.

According to the “Japanese Fiscal Budget Report,” the government expects fiscal revenue to reach 65 trillion yen. Although personal and corporate tax revenue may decrease by about 1.5%, growth in consumption tax and capital gains tax revenue will offset this loss. Especially under the standardization of consumption tax rates and long-term investment incentives in the capital market, capital gains tax revenue is expected to grow by 5%. Nevertheless, the fiscal deficit remains a major challenge for the government. Japan’s national debt to GDP ratio has exceeded 240%, the highest among developed countries globally. Although tax reform alleviates fiscal pressure by improving tax efficiency and expanding the tax base, the deficit problem remains severe. The government needs to continue balancing tax policies and economic growth in the coming years to ensure fiscal sustainability.

4.3 Attractiveness to Foreign Investment

The annual tax system reform has also had a profound impact on the attractiveness to foreign investment. The tax environment is an important factor for foreign companies in choosing investment destinations, and changes in the tax system directly affect investment decisions of foreign companies in Japan. In the 2023 tax reform, the government enhanced Japan’s attractiveness in high-tech manufacturing and green energy sectors through corporate tax incentives and R&D investment incentives. For example, the “R&D Investment Incentive Law” expanded tax credit policies for foreign companies’ local R&D investments in Japan, allowing foreign companies to enjoy more tax benefits when establishing R&D centers in Japan. Data shows that in the first half of 2023, foreign direct investment in Japan’s manufacturing industry grew by 6.8% year-on-year, benefiting from the push of tax incentive policies.

However, the increase in capital gains tax and dividend tax has had some negative impact on the investment willingness of foreign companies and high-net-worth individuals. According to new regulations in the “Capital Gains Tax Law,” the dividend tax rate for high-income investors has increased to 25%, which to some extent weakens the attractiveness of Japan’s capital market, especially when competing with other low-tax countries. In comparison, places like Singapore and Hong Kong have lower tax rates on capital gains and dividends, reducing Japan’s competitiveness in this aspect. Therefore, although the tax reform has promoted foreign investment inflows in high-tech and environmental protection fields, the attractiveness of the capital market may have weakened.

Conclusion

5.1 Overall Impact Assessment of Japan’s Annual Tax System Revision

From an overall perspective, Japan’s annual tax system revision has had a profound impact on the economy and society, involving adjustments to the tax structure, implementation of economic stimulus measures, and re-optimization of income distribution. According to the latest data from the “Japan Fiscal Budget Report” and “Tax Reform Policy Guidelines,” recent tax revisions have achieved certain results in increasing fiscal revenue, promoting social equity, and supporting industrial transformation. By increasing consumption tax and raising capital gains tax and dividend tax, the tax burden on high-income groups has been further increased, expanding fiscal revenue. Meanwhile, through policies such as personal income tax deductions and tax incentives for small and medium-sized enterprises, the government has alleviated the tax burden on middle and low-income families and SMEs. This adjustment not only balanced the fiscal deficit but also provided a guarantee for economic recovery.

At the individual level, tax relief policies have enhanced the consumption capacity of middle and low-income groups, especially with specific deductions in areas such as childcare and healthcare, helping to improve the living standards of these groups. For businesses, the government has promoted corporate technological innovation and environmental investment through tax system revisions, particularly measures such as R&D investment incentives and green tax policies. Although the tax burden on high-income enterprises and investors has increased, it has had a positive effect on overall economic vitality and corporate competitiveness, promoting Japan’s growth in the green economy and digital economy sectors.

5.2 Long-term Impact of Reforms on Economic Growth and Enterprises

The annual tax system revision has long-term impacts on economic growth and enterprises, mainly reflected in three aspects: improvements in consumption, investment, and innovation capabilities. First, tax policies have directly increased domestic consumption capacity by reducing the burden on middle and low-income groups. Data shows that since the implementation of tax reforms in 2023, Japanese household consumption expenditure has gradually rebounded, especially in the areas of daily necessities and services, with consumption recovery playing a role in driving economic growth. According to adjustments to the “Consumption Tax Law,” daily necessities continue to enjoy lower tax rates, a measure that helps maintain stable consumption and avoid negative impacts on household consumption due to excessive tax pressure.

Second, tax system revisions have had a long-term impact on corporate investment behavior, especially in high-tech and green technology fields. According to the “R&D Investment Incentive Law,” the upper limit for R&D expense tax deductions has been raised to 25%, encouraging more companies to invest in technological R&D and innovation. For manufacturing and high-tech industries, tax system revisions have enhanced these companies’ innovation capabilities, increased R&D investment, and thus promoted the development of new products and technologies. In the long run, this policy will further enhance the global competitiveness of Japanese companies, especially in high-growth areas such as new energy vehicles and environmental protection technologies.

Finally, the impact of tax system revisions on the capital market cannot be ignored. The increase in capital gains tax and dividend tax may have a certain negative impact on the investment behavior of high-net-worth investors in the short term, reducing the inflow of short-term speculative capital. However, the government has promoted more stable investment behavior through tax incentive policies for long-term investments. This policy adjustment will help gradually stabilize the capital market, reduce market volatility, and provide a healthier financing environment for enterprises.

5.3 Continuous Optimization Direction of Tax System Reform

In the future, the continuous optimization direction of Japan’s tax system reform needs to balance the relationship between fiscal stability and economic growth. First, the government should continue to ensure that high-income groups bear more tax burden through refined tax policies, further realizing income redistribution to address the increasing aging population and social security expenditures. According to the “Japan Social Security and Tax Integration Reform Plan,” it is expected that the government will continue to adjust personal income tax and capital gains tax in the coming years to reduce fiscal deficits and ensure the sustainability of the social security system.

Second, the government should further support corporate innovation and green economic development. As global demand for environmental protection and sustainable development increases, tax policies will become an important tool to promote corporate transformation. Future tax system reforms should further expand tax incentive policies for green energy, carbon neutrality projects, and technological innovation, enabling Japan to take a leading position in the global green economy.

Finally, tax system reform needs to focus on the long-term stability of the capital market. Although increased taxation on high-net-worth individuals and institutional investors may reduce investment willingness in the short term, by optimizing long-term investment incentives, the government can attract more funds into infrastructure, technology, and green industries, promoting sustainable economic growth.

Overall, Japan’s future tax system reform will move towards a more equitable, efficient, and sustainable direction. By continuously optimizing tax policies, the government can not only alleviate fiscal pressure but also provide more economic development opportunities for businesses and individuals, ensuring Japan’s long-term prosperity and stability.