Japan's ruling bloc approved a plan on Thursday to slash the corporate tax rate to around 20% from 30% - but only for companies that raise wages aggressively and boost domestic capital spending.
The carrot-and-stick approach is Prime Minister Shinzo Abe's most aggressive step yet to convince companies to lift wages 3%, which he believes is needed to stimulate consumer spending and vanquish the deflation that has plagued Japan for nearly two decades.
Qualifying companies would also need to substantially boost investment in factories and equipment.
The proposal, which would be effective for three years from fiscal 2018, needs parliamentary approval to be enacted.
It would bring real tax rates for qualifying companies in line with an average of around 23% among Organisation for Economic Cooperation and Development members, through greater deductions.
"We want to show how serious we are, so we decided to impose penalties such as depriving those who, despite record profits, won't increase wages or capital spending, of (existing) special tax measures," Tetsuo Saito, the head of the Komeito Party's tax commission told reporters.
But analysts are sceptical that the tax breaks will prompt Japanese firms to spend some of their record cash piles on higher worker pay amid concerns about the country's shrinking population and prospects for low growth.
"Policy tax breaks are put in place only for a specified period of time, therefore they are unlikely to encourage firms to boost permanently fixed costs such as base pay," said Koya Miyamae, senior fiscal analyst at SMBC Nikko Securities.
A recent Reuters poll of 230 big and mid-sized businesses found that two-thirds of respondents think Abe's wage rise target of 3% is unrealistic.
The annual tax code revision is expected to be endorsed by Abe's cabinet and submitted to parliament early next year for approval by April 1, the start of the next fiscal year.
Abe's ruling bloc also approved a raft of tax hikes for coming years to pay for a bulging welfare bill, at the risk of putting a damper on private consumption.
The government expects a rise in personal income tax effective in 2020 to bring in some 90 billion yen (€676 million) in additional annual tax revenue.