Economy and Public Finance
- No Gains without Reforms II -
Government of Japan
The Tax System Reform for Vitalizing the Economy
Section 1 Burden Structure of Individual Income Tax
With regard to individual income tax (national tax: Income Tax, local tax: Individual Inhabitants Tax), there have been several tax revisions since the 1980s. However, it is still pointed out that the tax burden is distorted and it is hard to wipe out people' s deep-rooted "sense of unfairness." Therefore, in this section, we will specifically investigate which generation and which income bracket is bearing the burden of the individual income tax by studying mainly salary income.
1. Trend of Individual Income Tax System in Major Countries
Most countries have simplified their tax rate structures
or made their taxes flatter since around the 1980s, but some also have
moved to make the rates more progressive or to raise the highest tax rate,
indicating tax systems have been revised by the government of the time
or based on the economic situation or the sense of social value of the
time (See Figure 2-1-1).
Figure 2-1-1 International Comparison of Changes in Income Tax Rates
The progressive structure of income tax in the United States had 15 brackets ranging from 14% to 70% before Ronald Reagan came to power. It was reduced to 14 brackets ranging from 11% to 50% by the Reagan tax reform of 1981. The 1986 tax reform, combined with the expansion of the taxation base through the abolition of various deductions, further reduced the structure to two brackets of 15% and 28%. However, the highest tax rate of 31% was added to the structure in 1990 and the tax rate structure was expanded to five brackets ranging from 15% to 39.6% in 1993. The taxation base was also expanded in 1990 and 1993. (Under the Bush tax cut law of 2002, the structure is slated to be gradually expanded to six brackets ranging from 10% to 35% by 2006.)
In the U.K., the Thatcher administration, which came into power in 1979, raised the value added tax from 8% to 15% (and then to 17.5%) and simplified the income tax rate structure and made taxes flatter twice. At present, the highest tax rate is 40% and the tax rate structure has three brackets.
In Germany, the tax rate has been on a downward trend since the second half of the 1990s (the highest tax rate is to be reduced to 42.0% and the lowest rate to 15.0% by 2005).
The tax rate structure of France, which had had more than 12 brackets throughout the 1980s, was simplified to six brackets (12-56.4%) in 1993. The highest tax rate has been gradually being lowered since 1982.
In Japan, the highest tax rate was lowered and the tax rate structure was simplified in the 1980s and 1990s. The income tax rate structure in 1980 had 19 brackets ranging from 10% to 75%, but now has four brackets ranging from 10% to 37% and both the minimum and highest tax rates are lower than in other major countries.
Generally speaking, the desirable standards for taxation are "impartial, neutral, and simple." The "Basic Policies 2002" says that it takes them to mean "fair, vigorous, and simple." The standard for being "neutral" means that the tax system should not distort the economic activities of individuals and corporations(4). Meanwhile, "vigorous" can be taken to mean that the efficiency of resource allocation should be maximized without diminishing the performance of the allocation function of the market as much as possible. The role of the government has come to be reviewed and the resource allocation by letting the market exert its function has become more important than ever. From the standpoint of promoting the economic vitality by bringing out the potential ability of individuals and corporations to the fullest extent, the principle of being "neutral" will become even more important.
The relationship of the three standards (fair, neutral, and simple) is that of trade-off in that not all of them are always satisfied at the same time and that if one of the principles is given weight, the importance of the other principles has to be sacrificed to some extent. Be that as it may, when considering a tax system what is important is whether the tax system as a whole is in line with the basic principles of being fair, neutral, and simple.
In the fundamental tax system reforms that were carried out in 1987 and 1988 against the background of taxpayers' rising sense of heavy taxes and feeling of unfairness of the tax system, the government, in addition to introducing the consumption tax, drastically cut individual income taxes and individual inhabitants taxes by easing the tax rate structure and expanding personal deductions and at the same time increased taxes on income from assets by abolishing, in principle, the tax-exempt personal savings system, introducing the separate taxation at source, and imposing taxes, in principle, on capital gains on stocks, etc. Since then, the government has implemented various measures, including a tax reform in 1994, review of the tax rate structure, and reduction of individual income tax burden. In FY1999, the highest tax rate was lowered and a 20% fixed-rate tax reduction was carried out.
2. Burden Structure since the 1980s
The current shape of individual income tax is largely based
on the fundamental tax system reforms implemented in 1987 and 1988. So,
let' s compare the changes of the effective rate of individual income tax
(a couple with two children) after major tax system reforms (See Figure
2-1-2). The figure shows that the curves of the effective tax rates
after the fundamental tax reform of September 1987 are flatter than the
curve before the reform, as the easing of the progressive tax structure
and the raising of the minimum taxable income that were implemented repeatedly
after the reform drastically reduced the tax burden, mainly for middle-income
earners. It shows that the income tax burden has been reduced considerably.
Figure 2-1-2 Effective Rate of Income and Inhabitants Taxes (Worker Household with 2 Children)
Figure 2-1-3, which compares the effective rate of individual income tax in advanced countries, shows that the income tax burden in Japan as a whole is extremely low compared with other advanced countries. The unique curve of the effective tax rate in Japan can be attributed to the facts that (i) since the minimum taxable income in Japan is high, the starting point of the curve of its effective tax rate is not the same as those of other advanced countries, and (ii) the lowest tax rates are different (with respect to national tax, the lowest tax rate in Japan is 10% (8% after the fixed-rate tax cut). Although it is also 10% in the U.S. and U.K., the rate then jumps to 15% in the U.S. and to 23% in the U.K.)(5) (See Figure 2-1-3).
Now, we will make a quantitative analysis of the current state of the income tax burden in Japan that has been brought about as a result of tax reforms implemented since the 1980s.
Figure 2-1-3 International Comparison of Effective Rate of Income and Inhabitants Taxes (Worker Household with 2 Children)
(1) Changes of burden structure
Decline in real effective tax rate
The real value of past income and that of present income, even if they are the same amount, are not the same, if price fluctuations are taken into account. The tax burden also differs depending on the type of household. Therefore, when comparing the tax burden, it is necessary to take these factors into account.
Figure 2-1-4 shows changes of effective tax rates by type of employment income. The effective tax rates are those in the case where the employment income of 1995 after indexed to the consumer price index is applied to each fiscal year (real effective tax rate). In consideration of the difference by type of household, the figure also shows the effective tax rate for three different types of households: "single person," "married couple with two children (spouse being a homemaker)," and "married couple with two children (dual-income households)" (6).
Figure 2-1-4 The Real Effective Tax Rate by Employment Revenue
Since they all show basically the same trend, let' s take a look at the case of households of "married couple with two children (spouse being homemaker)" . In the 1970s, the real effective tax rate fell drastically, as large-scale tax cuts were implemented in 1974 against the background of sharply rising inflation. Then, the real effective tax rate rose gradually due partly to a rise in inflation rate. In the 1980s, the real effective tax rate declined due to successive revisions of the tax rate structure, including tax rate cuts in 1987, 1988, and 1989. Throughout the 1990s, the real effective tax rate declined drastically as a trend due to special tax cuts in 1994, the drastic revision of the tax system in November 1994, special tax cuts in 1998, and fixed-rate tax cuts in 1999. These movements reflect the tax cuts implemented in and after the second half of the 1980s, such as the revision of the tax rate structure, including tax rate cuts.
The redistribution function of individual
income tax weakened
Although the most fundamental function of taxation is to raise funds for public services, it also has the function to redistribute income and assets through its progressive tax structure(7).
In order to see the progressiveness of individual income tax burden, let' s take a look at the distributions of employment income and income tax by employment income bracket (See Figure 2-1-5). A comparison of employment income distribution in 1990, 1995, and 2000 shows that employment income as a whole increased, as the proportion of the employment income brackets with 5 million yen or less decreased, while the proportion of the employment income brackets with more than 8 million yen increased. On the other hand, as to tax burden distribution, the proportion of the employment income brackets with 8 million yen or less decreased, while the proportion of employment income brackets with more than 8 million yen increased as a whole. Let' s verify the progressiveness of the individual income tax burden by using the proportion of the distribution ratios (income tax distribution ratio / employment income distribution ratio). If the progressiveness is high, the proportion should become high for high income earners. Figure 2-1-5 shows that there is progressiveness.
Figure 2-1-5 Income Tax Burden of Private-Sector Salary Income Earners
The Cabinet Office estimated the changes of the redistribution function of individual income tax in the 1990s based on the "Comprehensive Survey of Living Conditions of People concerning Health and Welfare" of the Ministry of Health, Labour and Welfare. As an index to show the degree of equality of income distribution, there is the Gini coefficient. It represents figures from zero to one, and the larger the figure is, the smaller the degree of equality is. The coefficient of redistribution, an index that represents percentage changes of the Gini coefficient from before taxation to after taxation, shows the strength of redistribution function(8).
A study of changes in the Gini coefficient in the 1990s shows that the Gini coefficient after taxation was on a rising trend (the degree of inequality increased) (See Figure 2-1-6). A study of changes in the coefficient of redistribution shows that the coefficient, which moved at 0.06-0.07 in the first half of he 1990s, dropped to the 0.05 level due to the effects of income distribution and tax system reforms(9).
It should also be kept in mind that social security policies have played an important role in income redistribution. According to the "Income Redistribution Survey" of the Ministry of Health, Labour and Welfare, while the redistribution by taxes has been weakening since the 1980s amid the rising trend of the Gini coefficient, the redistribution function by social security has been strengthened. As a result, the redistribution function of the two combined has been consistently rising since the 1980s (See Figure 2-1-7).
Figure 2-1-6 Changes in Redistribution Coefficient of Income Tax/ Inhabitants tax with Regard to Household Income
Figure 2-1-7 Changes of the Gini Coefficient and Redistribution Coefficient of Household Income from the 1980s
Historically and internationally low
Individual income tax in Japan had played the fundamental tax role for a long time, accounting for 30% of national and 25% of local tax. However, income tax revenue has dropped to the level of 1985 as a result of successive tax cuts implemented since the second half of the 1980s (See Figure 2-1-8).
A comparison of the ratio of the individual income tax to national tax revenues in advanced countries shows that the ratio in Japan is low even compared with those in European countries where indirect tax is deeply incorporated into the tax system, standing at 32.4% as against 36.6% in the U.K., 38.0% in Germany, and 32.7% in France. The comparable ratio in the U.S. stands at 74.5%. A comparison of the ratio of individual income tax to national income in advanced countries shows the ratio is 6.8% in Japan, 14.2% in the U.S., 13.9% in the U.K., 12.8% in Germany, and 11.2% in France, indicating that the individual income tax burden in Japan is about half the level in other advanced countries (See Figure 2-1-9).
As just described, the income tax burden in Japan is low both historically and internationally.
Figure 2-1-8 Changes of Income Tax Revenue and Burden Ratio
Figure 2-1-9 International Comparison of the Placement of Individual Income Tax in Tax System
(2) Current state of the burden structure of individual income tax
The individual income tax burden in Japan has been reduced considerably since the second half of the 1980s thanks to successive tax reforms aimed at easing the progressive tax structure.
Marginal tax rate of individual income
tax by household type
So far, we have looked at the tax burden structure in terms of the "effective tax rate" that shows the ratio of individual income tax to total employment income. Here, we will look at the burden structure of individual income tax in terms of the "marginal tax rate" that shows how much income tax and inhabitant tax will increase when employment income increases by one unit(10).
Figure 2-1-10 shows the marginal tax rate by household type. First, in the case of a married couple with two children (spouse being a homemaker), the marginal tax rate stands at around 10% for the households with employment income of up to 7 million yen, rises to the 20% level for the households with income of 9 million yen, to the 30% level at 12 million yen, to the 40% level at 14 million yen, and then levels off at more than 14 million yen. In this manner, the marginal tax rate increases with the rise in employment income due to (i) the increase in the applicable rates of income tax and inhabitant tax and (ii) the changes in the rate of deduction for salary income.
Although the marginal tax rate on taxable income is the same regardless of the types of households, in the case of "a single person" and "a married couple without children," the marginal tax rate on salary income differs depending on the availability of personal deductions, such as exemption for spouse and exemption of dependents(11).
Figure 2-1-10 Marginal Tax Rate, by Type of Household (Income and Inhabitants Tax Combined)
Large number of taxpayers in the lowest
Let' s take a look at the proportion of income tax by tax-rate bracket. As a result of the permanent tax cut, etc. implemented in 1999, the current income tax rate structure in Japan consists of four brackets ranging from 10% to 37% and the highest rate is lower than in any other advanced country (See Figure 2-1-11)(12). Moreover, as many as 80% of taxpayers fall under the lowest tax rate of 10% and if those to whom fall under the tax rate of 20% is added, they account for 96% of the total taxpayers(13). In the case of the U.K., only 10% of the taxpayers fall under the tax rate of 10%, while as many as 80% of taxpayers fall under the tax rate of 22% (See Figure 2-1-12). A study of the percentage distribution of income tax by pay level shows that those with income of 7 million yen or less account for only 39.1%, while employment income earners of more than 10 million yen shoulder 41.3% of the total income revenues, although they account for only 6.4% of the total number of employment income earners (See Figure 2-1-13).
Figure 2-1-11 International Comparison of Tax Rate Structure of Income/Resident Tax
Figure 2-1-12 International Comparison of the Ratio of the Number of Taxpayers (or Tax Files) by Marginal Tax Rate Bracket
Figure 2-1-13 Proportions of the Number of Taxpayers and the Amount of Income Tax by Earnings (Income) in Japan, the U.S., and the U.K.
Large number of non-taxpayers
A study of the ratio of non-taxpayers to the total number of employment income earners shows that the ratio moved almost sideways at around 15% until late in the 1980s but rose to 18.9% in FY2000. The ratio temporarily shot up to 25% in FY1998, but this was due to the special tax cut totaling 2.8 trillion yen (income tax; 38,000 yen for each employee and 19,000 yen for dependents) (See Figure 2-1-14).
By income class, it is not surprising that the lower the employment income is, the higher the ratio of non-taxpayers is. What is noteworthy is that the proportion of non-taxpayers is rising among middle-income earners (See Figure 2-1-15). As just described, one out of five employment income earners is a non-taxpayer(14).
Figure 2-1-14 Changes in the Ratio of Non-Taxpayers to the Number of Workers
Figure 2-1-15 The Number of Non-Taxpayers of the Income Tax by Salary Class
Behind the large number of non-taxpayers is the fact that the minimum taxable income is high in Japan. For example, the minimum taxable income is 1.144 million yen in the case of single people and 3.842 million yen in the case of a household consisting of a married couple with two children (spouse being a homemaker). A study of the minimum taxable income of a household consisting of a married couple with two children in five major countries (Japan, the U.S., Germany, the U.K., France) shows that such income in Japan is set at a high level(15) and is close to that in Germany (See Figure 2-1-16).
Figure 2-1-16 International Comparison of Minimum Taxable Income (Income Tax)
The minimum taxable income is determined by accumulating certain basic deductions and is a measure of the employment income level at which taxation starts. The minimum taxable income of employment income earners, who account for most of the taxpayers, can be obtained by adding the employment income deduction, basic personal deductions (basic exemption, exemption for spouse, special exemption for spouse, exemption for dependents), and deductions for social insurance premiums (See Figure 2-1-17).
Figure 2-1-17 Breakdown of Minimum Taxable Income and its Calculation Method
The minimum taxable income in Japan has come to a high level even by international standards as a result of repeated expansion of deductions in successive tax reforms implemented since the 1980s. A study of changes in the real minimum taxable income indexed to consumer prices by household characteristics shows that the minimum taxable income was raised drastically by expansion of deductions in tax cuts implemented in 1974 but then was lowered due to a rise in prices (See Figure2-1-18). Still later, the minimum taxable income of household consisting of a married couple with two children (spouse being a homemaker) in particular was raised drastically by the creation of the special exemption for spouse in 1987 and the expansion of various deductions in 1989. The minimum taxable income was further raised in 1995 by further expansion of various deductions. It shot up temporarily in 1998 due to the implementation of a fixed-amount tax cut. The difference in the minimum taxable income among the households of "single person," "married couple with two children (spouse being a homemaker), and "married couple with two children (dual-income households) is due to the availability of the exemption for spouse and exemption for dependents for the last two household categories (See Figure 2-1-19).
Figure 2-1-18 Trends of the Real Minimum Taxable Income by Characteristic of Household (Income Tax)
Figure 2-1-19 Recent Revision of Deduction System (Income Tax)
3. The Tax Burden through the Life-cycle and by Generation
As was described earlier, one of the standards for a desirable
tax system is being "fair." With the birthrate dwindling and the population
aging rapidly, it has become essential to look at the tax system from the
viewpoint of "inter-generational fairness" and "smoothing out of tax burden
through the life-cycle."
Here, we hypothesized a certain life cycle by using data (called cohort data) on average income by age bracket and simulated the year-by-year effective tax rate of individual income tax that a specific generation has to pay(16).
Measurement of effective tax rate of
individual income tax
The analytical method is as follows. First, we extracted employment income (excluding retirement benefits, etc.) of household heads classified into five-year age groups from the "Annual Report on the Family Income and Expenditure Survey" and processed them into one-year age groups by using the weighted averages of the neighboring groups. For life-cycle hypotheses, we calculated the average age of marriage and childbirth by using the "Vital Statistics of Japan." Specifically, we assumed an employment income earner covered by employees' pension insurance, health insurance, and employment insurance, and his spouse being a full-time housewife. We hypothesized that the employment income earner gets married at the age of 27 (wife at the age of 25), has a first child at the age of 29 (51 years old when the child becomes independent), and has a second child at the age of 31 (53 years old when the child becomes independent). Then, we simulated the effective tax rate of individual income tax for each fiscal year.
The effective tax rate is lower for
The question is how much the changes in income tax burden differ generation by generation under the above hypotheses. Let' s take a look at the time-series changes in the effective tax rate of income tax and inhabitant taxes combined through the life-cycle by generations. Figure 2-1-20 shows that the tax burden of the group of people born in 1945 had been lower than that of the next age group of people born in 1955 until they became 30, but thereafter their tax burden has been higher, with the effective tax rate moving at 5-7%. Incidentally, the effective tax rate rose when the people became 50 years or older. This is because the two children assumed in the life-cycle became independent and thus the application of the (special) exemption for dependents was terminated (See Figure 2-1-20). The effective tax rate for the group of people born in 1965 had been at almost the same level as that of the group of people born in 1945 until they become 30, but thereafter their tax burden has been considerably lower than those of older generations.
Reflecting the tax cuts since the mid 1980s, the effective tax rate for a given point in the life cycle is basically lower for younger generations.
Figure 2-1-20 The Simulation of the Effective Tax Rate of the Individual Income Tax
Average tax rate by age group
Next, let' s take a look at the average tax rate (= average tax amount / average employment income) of individual income tax age group by age group. The Cabinet Office calculated the average tax rate of employment income earners by using data of the "Comprehensive Survey of Living Conditions of People concerning Health and Welfare (1999)." The solid line in Figure 2-1-21 is the average tax rate. Since employment income (income amount) increases for higher age groups, the average tax rate also increases accordingly. The dotted line shows the amount of basic personal deductions (basic exemption, exemption for spouse, special exemption for spouse, exemption for dependents, special exemption for dependents) by age group. Since these deductions are applied according to household characteristics and the status of employment, the amount peaks at about 1 million yen in the middle-aged groups of people of 35-44 years old and decreases gradually thereafter (See Figure 2-1-21).
Figure 2-1-21 Simulation of the Average Tax Rate of Individual Income Tax by Age Bracket and the Basic Personal Deduction
Changes and present status of the burden
We have just investigated the changes and present status of the individual income tax burden.
First, the Japanese individual income tax burden in terms of the effective tax rate has decreased, reflecting the tax cuts, such as the reviews of the tax rate structure including tax rate cuts, that have been implemented since the second half of the 1980s, and is considerably lower than in other major countries. The redistribution function of individual income tax has also weakened. The ratio of income tax to total tax revenues has decreased and the tax burden in Japan, as measured by the ratio of individual income tax to national income, is about half the level in other advanced countries.
Second, as to the current status of the individual income tax burden, (i) as much as 80% of taxpayers fall under the minimum bracket of the income tax rate schedule and (ii) one out of five employment income earners is a non-taxpayer.
Third, as to the income tax burden through the life-cycle and by generation, (i) due to the tax cuts since the mid 1980s, the effective tax rate for a given point in the life cycle is basically lower for younger generations and (ii) since employment income (income amount) increases for higher age groups, the average tax rate also increases accordingly.
4. Actual State of Deductions: Issues and Analysis
In the analyses so far, we have learned that deductions are having various impacts on the individual income tax burden. Here, we will specifically verify what impacts the various deductions have on the burden.
Impacts of the deduction system on the
First, we will study to what extent various deductions have narrowed the income tax base from a macroeconomic aspect (See Figure 2-1-22). Figure 2-1-22, which was compiled based on each fiscal year' s budget, shows that the proportion of taxable income to the total amount of wages rose gradually to hit 46.6% in FY1994 but then began to decline and fell to 43.5% in FY2002. Due to the narrower tax base and a tax rate cut, the proportion of tax revenue to the total amount of wages fell from 6.4% in FY1985 to 4.5% in FY2002.
Figure 2-1-23 shows changes in the ratio of deduction for employment income and basic personal deduction, etc. to the total amount of wages. The figure shows that deduction for employment income accounted for about 30% of gross employment income in both FY1985 and FY2002 and remained the largest item that narrowed the tax base but that the proportion decreased slightly from FY1985 to FY2002. The proportion of basic exemption and exemption for dependents to gross employment income also decreased. The proportion of exemption for spouse and special exemption for spouse combined to gross employment income in FY2002 was higher than in FY1985 but this is mainly due to the fact that the special exemption for spouse was created in FY1987. Meanwhile, the proportion of "miscellaneous deductions," such as deduction for social insurance premiums and deduction for life insurance premiums, increased from 8.0% in FY1985 to 11.3% in FY2002 (See Figure 2-1-23).
According to the data on the proportion of the total amount of various deductions to employment income by income bracket, which was calculated by the Cabinet Office, the rate of deduction is more than 50% for up to the 1-million-yen income bracket, indicating that deductions have drastically narrowed the tax base (See Figure 2-1-24).
Figure 2-1-22 Trends of Employment Income Tax base (Income Tax)
Figure 2-1-23 The Ratio of Deductions and Allowance on Earned Income
Figure 2-1-24 Estimate of the Proportion of the Total Amount of Deductions to Employment Income by Income Bracket
Lastly, according to a study(17) that compared the extend of the narrowing of the income tax base caused by various deductions in Japan and the United States, the proportion of the "receipts of the household sector" to "tax base (taxable income)" was 27.4% (FY1997) in Japan and 53.2% (1996) in the United States. Although we cannot make an easy comparison due to the fact that capital gains are excluded, the figures show that the Japanese income tax base is about half that in the United States(18). The factors behind the big disparity between Japan and the United States can roughly be divided into the disparity in "social security not included in the tax base," such as social security benefits, and the disparity in "deduction for employment income" (See Figure 2-1-25). The disparity in "social security not included in the tax base" is due to the fact that there is "deduction for social insurance premiums" in Japan. The deductions can be further divided into those related to pension and those related to medical expenses(19). Considering the future aging of the Japanese population, the tax base will become even narrower with the increase in the amount of social security premiums (See Figure 2-1-26).
In the analyses so far, we have learned that deductions are having various impacts on the individual income tax burden. Here, we will specifically verify what impacts the various deductions have on the burden.
Figure 2-1-25 Japan-U.S. Comparison of the Ratio of Taxable Income (Tax Base) to Individual Income
Figure 2-1-26 Trends of Income Tax Base and Estimates for the Future (Ratio of Taxable Income to the Receipts of the Household Sector)
Actual state of personal deductions
In the individual income taxation, each individual' s living circumstances, such as family make-up, are considered as factors diminishing taxpayers' ability to pay and therefore various personal deductions have been introduced, including the basic exemption, the exemption for spouse, and the exemption for dependents (See Figure 2-1-27). Among personal deductions in the income tax are the special exemption for dependents, the special exemption for the handicapped, and the special exemption for the elderly.
Figure 2-1-27 List of Personal Exemptions (Income Tax)
The real deduction amount based on the consumer price index had been decreasing up to the first half of the 1980s. Though the amount has remained almost unchanged since the second half of the 1980s thanks to the stable movement of prices, the amount of the special exemption for dependents, which was created in 1989, has increased significantly in recent years (See Figure 2-1-28).
Figure 2-1-28 Changes in the Amount of Major Tax Deductions (Real)
The findings of the above-mentioned Japan-U.S. comparative study shows that the total of "personal deductions" -the basic exemption, the exemption for spouse, the special exemption for spouse, and the exemption for dependents-narrowed the tax base by 12.7% in Japan. On the other hand, there is only one personal deduction (Personal Exemption) in the United States and it narrowed the tax base by 8.1% (See Figure 2-1-29).
The Cabinet Office estimated the impact of the abolition of various deductions. For example, if the exemption for dependents were abolished, the income tax would increase by about 100,000 yen for a household consisting of a married couple with two children (one of them being a special dependent) and with an annual income of 5 million yen and by as much as 370,000 for a similar household but with an annual income of 25 million yen(20)(See Figure 2-1-30).
Lastly, let' s take a look at the impact of personal deductions on public finance. According to data published by the Ministry of Finance, the estimated amounts of income tax revenue loss as a result of the personal deductions are about 2.1 trillion yen for the basic exemption, about 1.2 trillion yen for the exemption for spouse and the special exemption for spouse, and about 1.8 trillion yen for the exemption for dependents (See Figure 2-1-31).
If the various deductions were abolished, the minimum taxable income would become lower, leading to some of those who had not paid income tax (non-taxpayers) becoming taxpayers. The Cabinet Office calculated the percentage of such employment income earners (See Figure 2-1-32). For example, if the exemption for dependents were abolished, 47.5% of the non-taxpayers who had been taking the deduction would become taxpayers. If the exemption for spouse, etc. were abolished, 59.2% of the non-taxpayers who had been taking the deduction would become taxpayers. As a result, income tax revenue would increase.
Figure 2-1-29 Results of Macroeconomic Estimates of Income Tax Base (Japan, U.S.)
Figure 2-1-30 Estimates of Increases in Income Tax Burden (per person, by annual income) in the Case of the Abolition of Personal Deductions
Figure 2-1-31 Estimated Amount of Tax Revenue Loss due to Income and Individual Inhabitants tax Deductions
Figure 2-1-32 Simulation Concerning the Proportion of Income Earners whose Income would Exceed the Minimum Taxable Income If Personal Deductions were Abolished
Effects of Exemptions for Spouse
Women' s life style has been diversifying as can be witnessed from their advance in the workplace and changes in family make-up and job style. Most women have job experience in one way or another. Moreover, a woman may become a full-time homemaker, a career woman, or a single parent in her life cycle. What is important is not to constrict women' s choice with regard to such matters as job and marriage. Discussions are now being held to review the tax exemptions for spouse, etc. that have come under criticism as not being neutral in its impact on people' choice of activity from the viewpoint of a gender-equal society. The "Basic Policies 2002" also says that it will "conduct study on the tax exemption for spouse, so that it would not distort people' s choice of work, etc." We will analyze and examine the impact of, in particular, the exemption for spouse and the special exemption for spouse below.
In Japan, "salaried man + full-time housewife" households became popular during the high growth period. As a result, systems designed for full-time housewives are still in place in various fields(1). In 2000, the number of people who took the exemption for spouse came to 12.79 million among the employment income earners who made year-end tax adjustments and 2.27 million among the people who made self-assessment of taxation. The number of people who took the special exemption for spouse was 11.51 million among the employment income earners who made year-end tax adjustments and 2.05 million among the people who made self-assessment of taxation.
Next, let' s see how the disposable income of a household would change when the wife' s income increased by using the earlier-mentioned tax-system simulation model of the Cabinet Office (See Figure 1). Here, we presuppose a household consisting of a married couple with no children and the income being only employment income(2). The figure shows changes in the disposable income of the household when the wife' s income has increased and the husband' s salary has remained unchanged (at 4.36 million yen; the average employment income of those aged 30-39). Graph A shows the total income (employment income + allowances for spouse) of the household. The graph bends when the wife' s income exceeds 1.03 million yen, as corporations generally stop granting the allowance when wife' s income reaches that level. Graph B shows the disposable income of the household. If the exemption for spouse and the special exemption for spouse were abolished, it would cause a downward shift of the portion of the wife' s income below 1.41 million yen.
Lastly, let' s see how much the tax burden of the household would increase if the exemptions for spouse were abolished on the same assumption as the above (Figure 2). The figure shows that when the wife' s income is low, the abolition of the exemption for spouse and the special exemption for spouse would increase the after-tax income of the household by 95,000 yen when the husband' s income is 2 million yen and by 218,000 yen when the husband' s income is 10 million yen.
(1) Among other systems for full-time housewives are (i) the 1.3 million base in the social insurance system and (ii) the welfare compensation plan (or so-called allowances for spouse).
(2) The husband is 30 years old, is covered by employees' pension insurance, government health insurance, and employment insurance, and lives in an area with a population of 50,000-500,000.
Figure 1 Increase in Wife' s Income and Change in Household Disposable Income
Figure 2 Increase in Husband' s Individual Income Tax Burden at the Time of Abolition of Exemptions for Spouse (by Annual Income of Husband)
Actual state of the elderly-related
One of the structural problems of the Japan' s economy is that the "lack of intergenerational equity" has been increasing amid the rapidly falling birthrate and aging population(21). Although not all the elderly are poor as compared with younger people, as can be understood from the fact that most of the 1,400 trillion yen personal financial assets are held by the elderly, there are many preferential measures for the elderly. On the other hand, the general image of the middle-aged generations with dependent family members is that they are plagued with tax and social insurance burdens.
For example, under the current tax system of public pensions, such as national pension and employees' pension, all the insurance premiums paid by the elderly for public pensions are tax deductible as social insurance premium deductions, while pension benefits are in effect excluded from the taxable income as they are deductible as public pension deductions or as age allowance(22)(See Figure 2-1-33). Moreover, the minimum taxable income for the recipients of public pensions (couple households(23)) is 3.399 million yen, 1.5 times as much as that of people currently earning wages, which stands at 2.2 million yen. As a result, a significant difference in tax burden ( "lack of intergenerational equity" ) is observed between the working generation and the elderly of the same income level. Take couple households with an annual income of 5 million yen, for example. While the worker' s household pays about 230,000 yen in income and inhabitant taxes combined, the pension recipient' s household pays about 150,000 yen (See Figure 2-1-34).
It has been pointed out that the current deductions are making the tax burden extremely low for elderly people with incomes other than pension, as pension benefits are classified as something different (miscellaneous income) from employment income(24).
On a macro basis, of the 32.7 trillion yen in public pension payments, only less than 7% are subject to deduction at source. Moreover, the estimated amount of tax revenue loss as a result of the elderly-related deductions is approximately 1.9 trillion yen for the income tax and income inhabitant tax combined (See Figure 2-1-35).
Figure 2-1-33 Taxation System Concerning Public Pensions
Figure 2-1-34 Income/Individual Inhabitants tax Burden on Pension Income and Employment Income
Figure 2-1-35 Tax (Deduction at Source) Concerning Public Pensions