Refundable Tax Credits: Debate on Sources of Funding Must Not be Left by the Wayside

Editorial

15:05 JST, June 3, 2026

As part of integrated reform of the social security and tax systems, a concrete institutional design is being made for refundable tax credits, which Prime Minister Sanae Takaichi has positioned as the “core of the reform.”

To finalize the key details — such as the benefit amounts and eligibility criteria — it is essential to conduct discussions on funding sources simultaneously.

Refundable tax credits are a mechanism that combines cash benefits with tax cuts to support household budgets. The national council on social security, comprising the government and both the ruling and opposition parties, has released a draft proposal for this system.

Based on the concept of a “net burden rate” — which comprehensively considers taxes, social insurance premiums and other factors — the draft proposal aims to reduce the burden primarily on low- and middle-income earners of working-age generations.

The council is considering measures such as increasing benefits to address consideration for those with young children and the “annual income threshold” for the imposition of income tax that leads to a decrease in take-home pay. This seems to be a generally appropriate direction.

To design a fair system that incorporates tax credits, it is necessary to track income from sources such as financial transactions and real estate.

Since establishing such a system takes time, it is understandable to consolidate the approach into cash benefits for now. However, to provide more meticulous support, discussions on tax credits should continuously be made as well.

With the progression of an aging society, the cost of social security benefits — including those for pensions and medical and nursing care — continues to grow.

It is reasonable to fund these through a consumption tax hike. However, due to strong public resistance to tax increases, the benefits have been covered primarily by raising social insurance premiums, which are deducted directly from salaries.

For a two-worker household with two children and an annual income of ¥3.75 million, the overall net burden, including tax payments, is reportedly ¥270,000 higher per year than that in the United States, Germany and France. The current situation, in which distortions have arisen in the system, cannot be left unattended.

The problem is that debate on how to secure funding sources has been left by the wayside. Under these circumstances, public debate on specific measures will not gain any depth.

Takaichi has emphasized that, as a “stopgap” measure until the introduction of refundable tax credits, the reduced consumption tax rate of 8% will be lowered to 0% only for food items for a limited period of two years. However, since lowering the rate to 0% would require time to modify cash registers, an unconventional plan to set the rate at 1% is also being considered.

However, the consumption tax is a vital source of funding for social security. It should not be used for short-term measures to combat rising prices.

In addition, it is inconsistent that while the national council is moving forward with the institutional design for the reform that prioritizes benefit payments, the government is considering implementing a consumption tax cut starting in April next year. There is still no clear prospect of a way to secure funding sources to make up for the tax cut. An irresponsible decision to prioritize the tax cut must not be made.

Leaving debate on funding sources behind would undermine market confidence and perpetuate the vicious cycle of a weak yen and rising prices. Far from benefiting the public, this would only make people’s lives more difficult.

(From The Yomiuri Shimbun, June 3, 2026)