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Japan: Ruling Parties’ Reform Outline Lacks Fiscal Steps to Finance Social Security
Source: http://the-japan-news.com
Source Date: Friday, December 09, 2016
Focus: Electronic and Mobile Government
Country: Japan
Created: Dec 13, 2016

How can Japan’s vitality be boosted from a tax system perspective? It is hard to say the fiscal 2017 tax system reform outline mapped out by the ruling parties squarely faces this challenge.

After reviewing spousal deductions for income tax — the focus of the reform discussions — the annual upper limit for full deduction eligibility will be raised from the current ¥1.03 million to ¥1.5 million. To help raise the required fiscal resources, households headed by high-income earners will be excluded from the spousal deduction system.

The ¥1.03 million threshold, which effectively limits the working hours of part-timers so their annual incomes do not exceed that figure, was broken. However, a new ¥1.5 million threshold — which cannot lead to full-scale reform of working styles for women — was set instead. Households in which the husband and wife work full-time will continue to be left with a sense of unfairness.

The outline describes the plan as the “first round” of national income tax system reforms, in line with structural changes to society. The outline calls for “recovering the functions of income redistribution.”

It is essential to thoroughly consider the tax deduction system for couples, regardless of the way they work. It is necessary to change the tax system from one that benefits high-income earners to one that sets deductions regardless of income earned.

Research must be carried out steadily to achieve such sweeping reforms.

In relation to the growth strategy, the outline proposes a reform that would encourage firms to invest more and hike wages. This is an understandable initiative.

The outline calls for expanding corporate tax breaks for companies that increase research and development budgets, and granting tax cuts to small and medium-sized firms that raise pay above certain levels.

Show vision for future

Corporate internal reserves are robust, at about ¥380 trillion. Reform measures, including deregulation to help support aggressive corporate management, must be devised so the effects of tax reductions are not just temporary.

The stricter eligibility criteria for tax cuts for eco-friendly cars, which have been decided, should lead to more vehicles with better fuel efficiency becoming available. The planned unification of liquor tax rates for beer and beer-like drinks would lead to the creation of more beer varieties. Businesses are urged to utilize tax reforms to develop consumer-oriented products.

It is not good enough that the outline lacks a viewpoint regarding securing fiscal resources for social security programs, despite pointing out that “structural problems such as population decline and an aging population, combined with declining birthrates,” have caused public anxiety and pessimism.

A consumption tax rate hike to 10 percent, which could become a fiscal resource for unifying social security and tax system reforms, was postponed until October 2019. The outline confirms this will be implemented as scheduled, and that reduced tax rates for certain items will be introduced.

The outline does not go beyond saying the tax increase is aimed at achieving fiscal soundness and thereby fails to mention the need for fiscal resources that would substitute for the tax hike until it is implemented.

The public’s anxieties cannot be removed unless future visions of tax and social security systems are presented. To stimulate consumption and break away from deflation, the government and ruling parties must present realistic visions for a unified reform of the tax and welfare systems.

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