Issues in the Reform of Personal Income Taxation
The Need for Tax Reforms to Support Child‐Raising, Employment,
June 15, 2005
Background to and Directions for the Reform of Income Taxation
1．Background to the Reform of Income Taxation
（1）A significant fall in income taxation revenue due to a series of tax cuts
（2）The need to respond to structural change in Japanʹs economy and society
（3）The transfer of sources of tax revenue from central to local government under the sanmi‐ittai [three‐in‐one] reforms
2．Directions Set Out in the Report of the Government Tax Commission (scheduled for publication on June 21)
The specific directions proposed in the report, in view of the conditions described above, are as
(Compiled by JRI from newspaper articles published on June 11 and earlier press coverage relating to the Report of the Government Tax Commission, scheduled for publication on June 21, 2005) ・The reduction of the deduction for employment income. The expansion of the scope of application of the special deduction for expenses
・ A review of the deduction for spouse, including possible abolition
・The abolition/reduction of the special deduction for dependents
・The conversion of the deduction for dependents to a tax credit
・Greater taxation of retirement income
・The abolition of deductions for life insurance premiums and non‐life insurance premiums against individual local inhabitantsʹ tax
・A review of income brackets
・The creation of a new 5% tax bracket for income tax and the raising of the maximum tax rate to 40%
・Imposition of a 10% flat rate of local inhabitantsʹ tax
・A review of income categories
・Measures to help establish a clearer picture of incomes through the enforcement of rigorous bookkeeping among sole traders, etc.
3. Objectives of this Article
This article aims to contribute to future discussion through the following two.
(1) Case studies relating to tax credits, focusing on the United States and United Kingdom*1.
JRI will analyze the approach taken in OECD countries, which have already introduced tax credits, particularly the United States and the United Kingdom, and consider what lessons their experience may hold for Japan. The United States has operated a system of tax credits for many years and this system was enhanced under the Clinton administration. The United Kingdom recently followed the example of the United States, introducing tax credits as part of a general reform of taxation and social security.
(2) Estimates of the impact of income taxation reforms*2
JRI will estimate the impact of income taxation reforms including the abolition of deductions such as the deduction for dependents and the introduction of tax credits. In particular, establishing a clear picture of the nature of tax credits, including refund systems, will necessitate estimates broken down by household type and income bracket. The debate on the transfer of sources of tax revenue is due to begin in earnest in the autumn of 2005 and will therefore be discussed in another article.
1. Most of the measures proposed in the Government Tax Commissionʹs report — the reduction of the deduction for employment income, a review of the deduction for spouse, etc. — have been debated on numerous occasions in the past and one could take the view that it is now simply a matter of their degree and the timing of their implementation. In Japan, where deductions from income have traditionally been the main form of deduction in the tax system, switching from a system of deductions from income to one of tax credits is a relatively new idea and, if such a change takes place, it will represent a revolution in thinking on income taxation. Partly for this reason, there is a sense that the debate has only just begun. For instance, there is a need for still further discussion not only of non‐refundable tax credits, the traditional concept of tax credits, but also of refundable tax credits.
2. Although the directions proposed in the Government Tax Commissionʹs report are heavily geared towards a rise in tax revenue, it is not sufficiently clear what they will mean in quantitative terms and quantification would be desirable. Needless to say, the reform of income taxation will have a considerable impact both on households, in terms of day‐to‐day budgeting and planning for the future, and on the macroeconomy. Consequently, even if a rise in tax revenues is inevitable, it is important that the debate be pursued, as far as possible, in quantitative terms, both to reduce uncertainty and to gain greater public support.
For more information on the content of this report, please contact Kenji Yumoto the Japan Research Institute, Limited.
Kazuhiko Nishizawa the Japan Research Institute, Limited.