MyVision

No.18 2016.2

Income Disparity
and Japanʼs
Taxation System
The issues of non-regular employment among the middle-aged and elderly andpoverty among the elderly are causing concern in Japan. Are the nation’s tax
and social security systems functioning adequately in terms of reducing the burden on the poorest stratum of the population? This issue of My Vision considers
programs of reform to address the problems of Japan’s growing poor.

CONTENTS
Expert Opinions

How should Japanʼs Tax System Respondto Growing Income Disparity?

Towards a society in which citizens Understanding the status of assets
can live comfortably despite non- by means of the Social Security andregular employment
Tax Number System
Ayako Kondo

Keiichiro Kobayashi

Associate Professor, Faculty of International Social
Sciences, Yokohama National University

Professor, Faculty of Economics, Keio University

Correct the regressivity of social
Respond to the problem of the working
insurance premiums
poor by providing refundable tax credits
Shigeki Morinobu
Professor, Chuo Law School

Establish beneﬁt mechanisms thatencourage people to work
Motohiro Sato

Professor, School of International and Public Policy,
Graduate School of Economics, Hitotsubashi University

About this Issue

Yuri Okina

Takashi Oshio

Professor, Institute of Economic Research,
Hitotsubashi University

Expert Opinions

How should Japanʼs Tax System Respond to
Growing Income Disparity?
In recent years, income disparity has been increasing in Japan, and the growth of a poor class is becoming
a significant problem. Against a background of change in Japanʼs economy and society, what are the areasin which the existing tax system is unable to respond? Looking towards the realization of wide-ranging
solutions to the problem of poverty, how should the tax system be reformed? In this issue of, weseek opinions from specialists in labor economics, the taxation system, public finance, macroeconomics,
and public economics.

Interviewer: Mari Kawamoto, NIRA Research Coordinator & Assistant
Editor: Kazuyoshi Harada
Period of interviews: October 2015

Towards a society in which citizens can live
comfortably despite non-regular employment
Ayako Kondo
Associate Professor, Faculty of International Social Sciences,
Yokohama National University
The fact that social insurance premiums are regressive and theburden is greater on lower income earners is the most important
issue in considering the problem of poverty. Non-regular employees who work less than 30 hours per week are not able to beenrolled in standard employees’ insurance, and have no choice but toenroll in the National Health Insurance and National Pension systems. The burden of premiums is high for these employees. For
example, the burden is comparatively higher for a non-regular
employee earning two million yen per year than for a regular employee earning a salary of three million yen per year who is enrolled in
employees’ insurance.
There are also problems in Japan’s tax system. The tax rate for theupper middle class, earning around eight million yen per year, is low incomparison to Europe and the US, and the burden on this stratumof the population is low.
Due to these systemic problems, those on whom the greatest
burden falls are single, non-regular employees ranging in age up to
their 40s. Because it is difficult to find justifications for the provision of support to healthy, childless members of the working
generations who are able to work, and such a measure would havetrouble winning political support, mechanisms for the redistribution ofincome via the social security and taxation systems are essential.
Looking at the Gini coefficient (a measure of the degree of income
inequality) for the working generations, we find that the coefficient isunchanged before and after the redistribution of income, indicating that
income redistribution is not taking place among the members of theworking generations.
The generation which experienced the effects of the “employment
ice age” are now in their late 30s and early 40s. The percentage of this age

group engaged in non-regular employment is gradually increasing.
From next year, the scope of application of employees’ insurance will
begin to be increased. Because it will be extremely difficult inpractice to realize regular employment for all non-regular employees, it will be necessary to introduce modes of work which fill the gap
between the employment conditions for regular and non-regular
employment, enabling non-regular employees to gain a sense of
security. ■A specialist in labor economics, Associate Professor Kondo researches
the status of employment of young people. She views the difficulty ofmaking the transition from non-regular employment as a generationaleﬀect produced by the ongoing economic downturn when young people enter the labor market.

Respond to the problem of the working poor
by providing refundable tax credits
Shigeki Morinobu
Professor, Chuo Law School
In Japan, we have unemployment insurance as the primary
safety net, and public assistance, which is considered a last line ofdefense. In-between these two, however, measures are lacking. Thismeans that we lack measures for the working poor, who are engaged infull-time work but earn only two to three million per year. This was notpreviously a significant problem in Japan, but with the proportion of theworking population involved in non-regular employment having
risen to between 30 and 40%, if the issue of the working poor remains
unaddressed, it will lead to problems of poverty and may exacerbate thenation’s low birth rate.
The introduction of refundable tax credits would be an effectivemeans of responding to this issue. Under a system of this type, tax
exemptions would be granted to individuals earning a specificlevel of income on condition that they were working; if the amountof the deduction exceeded their tax burden, they would be granted

My Vision No.18

benefits. Japan’s social security system lacks any measures toprovide incentive. A system which did not simply provide benefits, but
provided benefits on condition that the recipient was working, would
assist people in avoiding the poverty trap.
Despite the fact that the Tax Reform Bill formulated in 2012 statesthat the potential for the introduction of refundable tax credits will be
examined, no such examination has proceeded. The main reason for thisis that tax refundable tax credits is a concept involving the integrated management of taxation and social security, straddling
government agencies. The system could not function without cooperation between the Ministry of Finance, which is responsible for the
taxation system, and the Ministry of Health, Labour and Welfare, which
supervises the social security system.
The provision of benefits is also susceptible to criticism as“government handouts.” This problem could be avoided if thesystem was designed to reduce social insurance premiums in the form of an
offset rather than providing benefits. This type of scheme is inoperation in the Netherlands, and is probably the most feasible
system. ■A leading authority on taxation, Professor Morinobu specializes in the
study of tax law and tax policy. He conducts wide-ranging research regarding integrated reform of Japan’s social security and taxation systems, and emphasizes the necessity for tax system reform in order tobalance economic growth and fiscal reconstruction.

Establish benefit mechanisms that encourage
people to work
Motohiro Sato
Professor, School of International and Public Policy,
Graduate School of Economics, Hitotsubashi University
Policies of redistribution of income to the poorest classes of society should be effected through the taxation system, with income tax
playing a significant role. The reason that Japan’s income tax system lacks this redistributive function is the system of income deduction. From the perspective of enhancing the redistributivefunction of the tax system, we should re-examine income deduction,and levy appropriate taxes from high income earners.
At the same time, mechanisms to transfer tax funds to low income
earners would be necessary. In Japan’s income tax system, individuals whose incomes are lower than the threshold for taxation are nottaxed, but do not receive any benefits. The poor among the working
generations, the stratum which is becoming an issue, are able towork if presented with the opportunity. From this perspective, earned
income tax credits, a mechanism for the transfer of funds which
rewards working people, would be an effective measure. Because
under a system of this type, if the individual has no working income, theyreceive no benefits, it encourages the seeking of employment. This can beconsidered to be a system that possesses an appealing consistency,
given that the worker receives benefits when their income is low, and thenreturns to society in the form of tax payments when their income issufficiently high.
At the same time, it would also be necessary to consider the
taxpayers who support the system. We should levy taxes broadly andthinly, without increasing the marginal tax rate. In order to promote
employment among taxpayers to support the system, we would need toeliminate impediments to female employment, such as the spouse
exemption.
The first issue in introducing an earned income tax credit isunderstanding income. In addition to the fact that low-income

earners might be working several part-time jobs, because they do not
pay tax and thus do not file tax returns, their income is not clearly known.
The commencement of the Social Security and Tax Number system
offers considerable potential for understanding the income status of
low-income earners. The next issue in introducing the system would be therealization of close cooperation between the tax authorities, responsible for levying taxation, and municipal offices, which will be
responsible for distributing benefits, with smooth communicationand the sharing of income information between the two. ■Professor Sato is an expert in the fields of taxation and local government
finance. He emphasizes the necessity for reform of Japan’s regional taxation system in order to enable the nation to stabilize regional taxation
revenue and respond to economic globalization. Professor Sato is currently a member of the Cabinet Office’s Tax Commission.

Understanding the status of assets by means of
the Social Security and Tax Number
Keiichiro Kobayashi
Professor, Faculty of Economics, Keio University
Given the severe state of Japan’s public finances, tax increases
will be unavoidable, and sizeable cuts in government expenditure will
also be necessary. There will be no choice but to limit social security-related expenditure in areas such as welfare, pensions, andmedical care for the elderly. It will be essential, however, to simultaneously increase taxes and reduce government expenditure insuch a way that the placing of a burden on the poorest members ofsociety will be avoided as much as possible.
The chief focus will no doubt be on increasing taxes via theconsumption tax. However, because consumption tax also affects low
income earners equally, it will be necessary to introduce some means of
reducing the burden. We must consider tax mechanisms which will
reduce the impact on the nation’s poorest as much as possible,
perhaps via a mechanism to reduce the tax rate, or in the form ofrefunds. We should avoid basing decisions exclusively on a consumption tax level of 10%; it will be necessary to design a robust
system based on the assumption of further increases in the tax rate.
Another essential initiative will be the creation of appropriate tax andsocial security mechanisms based on an understanding of the distribution of assets realized through the intelligent use of the Social
Security and Tax Number system. At present, the disparity between rich andpoor is increasing most markedly among the elderly. Whether weshould present all of Japan’s elderly with identical social security
benefits and levy the same tax burden from them all is a question that
requires rethinking. In many cases, it is not possible to gauge thewealth of the elderly based on income alone. Using the Social Security and Tax Number, we would be able to link individuals tofinancial assets, real estate, etc. While privacy may be sacrificed to someextent, it is necessary for the authorities to understand the distribution of individual assets and to vary the allocation of tax burden andsocial security benefits between rich and poor. We must aim towards fairtaxation and social security systems that redistribute wealth from therich to the genuinely poor. ■A specialist in macroeconomics and financial theory, Professor Kobayashi conducts theoretical research on economic fluctuations, seeking to formulate macroeconomic models which incorporate the financial system in a substantive form. Professor Kobayashi also actively
conducts research on issues of political economy, for example change ofgovernment.

Correct the regressivity of social security
premiums
Takashi Oshio
Professor, Institute of Economic Research,
Hitotsubashi University
In considering policy measures for the redistribution of income,there are many more problems with regard to the social security
system than the taxation system. It will be essential to examine
measures for the correction of the regressivity of social insurance
premiums. Because premiums in the National Pension and National Health Insurance systems are fixed, or involve a fixed portion, theyfunction regressively, with the burden becoming relatively greater as thecontributor’s income becomes lower.
The National Pension and National Health Insurance systems wereoriginally formulated with the self-employed and individuals involved inagriculture and forestry in mind, and there was no considerationof the connection between premiums and income. Recently, however, there has been a massive increase in the number of non-regular employees of private companies joining the National Pension andNational Health Insurance systems. These individuals have relatively low incomes, and thus are directly confronted by the regressivity of social security premiums. Not only is this situation
unacceptable in itself, but it also increases the risk that low income
earners will be alienated from the safety net provided by medical
insurance and the public pension. It is possible, in fact, to verify themagnitude of the problems of late payment and non-payment ofsocial insurance premiums among lower-income earners. It israther paradoxical that the citizens most in need of support find it
difficult to benefit from the social safety net.
In order to address this issue, we must consider the best way torespond to the burden of social insurance premiums together with there-examination of the taxation system.
With the introduction of a system of refundable tax credits, low
income earners whose incomes are below the taxable threshold would
receive benefits only to the amount that the deduction exceeds theamount of tax that would have been paid. In addition, the tax amount
granted as a benefit would offset the burden of social insurance
premiums. This type of system has already been introduced in the
Netherlands. The introduction of such a system would ensure that even
if no benefit was paid, the burden of social insurance would be
reduced, and low income earners would be more able to contributepremiums. Social security reform linked to taxation reform will beessential if we are to maintain Japan’s world-class universal pension anduniversal health insurance systems. ■A specialist in public economics, Professor Oshio studies social security
and income distribution, and the optimal direction for income redistribution and education policies. In the area of social security, he conducts
international comparisons of factors including the eﬀect of the social security system on employment among the elderly.
This is a translation of a paper originally published in Japanese.
NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul.

About this Issue

Income Disparity and the Tax System

In November 2015, the Cabinet Office’s Tax Commission published a
proposal for income tax reform. Based on a socioeconomic analysis ofJapan, this document indicated that the increased proportion of lowwage work, particularly among younger people, and changes in themodel of the family, had not only affected the functioning of former social and family safety nets and weakened the economic foundations ofcitizens’ lives, but also threatened to exacerbate Japan’s low birth rateand impede the formation of human capital, thus presenting a risk forthe foundations of national growth.
It is essential that we mobilize a range of policy efforts, for example
in the areas of the childcare system and the job support system, in orderto respond to the problems these changes in Japanese society are generating. It will also be necessary to re-examine income tax, assets tax, andother aspects of the taxation system, in order to enhance the system’s
redistributive function in tandem with the social security system, allowing us to correct economic disparities and create a society in which every individual is able to marry and raise children if they so desire.
In this issue of My Vision, we gauge our expert interviewees’ thinking regarding the relationship between Japan’s growing socioeconomic
disparities and the taxation and social security systems, and seek theiropinion concerning the perspective that we should adopt and the ways
in which we should reform systems in order to address the issues. Theinterviewees are united in their opinion that responses through the taxation and social security systems are lagging behind. Many indicate that
responses to the regressivity of social security premiums, in particular
for low-income earners, and the transition to a taxation system that offers job support will be essential. As new measures necessary to achievethese ends, they suggest the effectiveness of the introduction of a systemthat combines a system of refundable tax credits, particularly a systemof earned income tax credits that benefits working people, and a benefits
system that offsets social insurance premiums. As infrastructure for thecorrection of disparities, the importance of using the Social Security
and Tax Number system which is being introduced this year to gain athorough understanding of income and assets is indicated.
The reconstruction of the foundations for citizens’ lives and national
growth is a race against time, making the early examination and implementation of these policies an urgent matter.
Yuri Okina, NIRA Executive Vice President(Vice Chairman of the Japan Research Institute, Limited)

National Institute for Research Advancement (NIRA)
4-20-3 Ebisu, Shibuya-ku, Tokyo 150-6034, Japan(URL: http://www.nira.or.jp/english/)(Facebook: https://www.facebook.com/nira.japan)
For more information : info@nira.or.jp
Tel +81-3-5448-1710
Fax +81-3-5448-1744
Copyright Ⓒ 2016 by National Institute for Research Advancement