Income Wall Explained: What the New Tax Deal Means for Workers

Talks between the Liberal Democratic Party (LDP) and the Democratic Party for the People (DPP) over raising the income tax–free threshold, nicknamed the "income wall," concluded on December 18. They reached an agreement to raise it to ¥1.78 million JPY ($12,000 USD). The deal also incorporates a mechanism sought by the DPP to extend tax cut benefits to middle-income earners. While most salaried workers are expected to benefit, only a limited portion are likely to see tangible tax reductions.

What Is the Income Wall

The "income wall" refers to the income level at which individuals begin paying income tax. In practice, the "income wall" is the point at which income exceeds the total value of available deductions. It is calculated by adding the basic deduction for all taxpayers to the minimum employment income deduction for salaried workers. At present, income tax applies once earnings exceed the value of available deductions. For those earning up to ¥8.5 million ($57,000) annually, the basic deduction is adjusted downward in four stages as income increases. This does not mean income up to ¥8.5 million is tax-free. Rather, it determines how much income is shielded from tax, with the maximum combined tax-free threshold set at ¥1.6 million ($10,500).

Under the new agreement, the income wall is intended to be raised every two years in line with changes in the Consumer Price Index, subject to the government’s implementation.

In fiscal year 2026, the basic deduction and the minimum guaranteed employment income deduction will each be increased by ¥40,000 ($270).

Additionally, as a temporary measure through fiscal year 2027, the extra portion of the basic deduction for taxpayers earning up to ¥6.65 million ($44,000) will be expanded, increasing the amount of income exempt from tax for this group. Combined with the income-linked employment deduction, this is expected to lift the effective income wall to ¥1.78 million ($12,000) or higher for all taxpayers, according to estimates.

Uneven Benefits and Fiscal Costs

Challenges remain, however. Takuya Hoshino, chief economist at Dai-ichi Life Research Institute, notes that "under the agreed framework, the benefits are relatively concentrated among middle-income earners."

*Prime Minister Sanae Takaichi (right) and Democratic Party for the People leader Yuichiro Tamaki smile after signing an agreement on the "income wall" at the National Diet, December 18.*

According to estimates by Hoshino, assuming either a single-person household or a dual-income couple, a taxpayer earning ¥6 million ($40,000) annually would receive a tax reduction of ¥37,000 ($250) in fiscal year 2026 compared to 2025. By contrast, a taxpayer earning ¥2 million ($13,300) would see a reduction of ¥7,000 ($45). At the upper end of the income scale, however, a taxpayer earning ¥10 million ($66,700) would receive a similarly modest reduction of ¥8,000 ($55).

Aside from the inflation-linked increases, the measures are temporary. The resulting loss in tax revenue is estimated at approximately ¥650 billion ($4.3 billion), and the cost would rise further if the measures were made permanent in the future. Moreover, the added complexity of the system is expected to increase the administrative burden on companies, including procedures such as year-end tax adjustments.