A Refundable Tax Credit Scheme for Low-Income Earners under Consideration by the Government
Discussions on the reform of Japan’s tax system are currently gaining momentum. They are to be considered within the framework of the recovery efforts from the great disaster of March 2011, and take place under the policy of “integrated reform of social security and tax system” of the government led by the Democratic Party of Japan (DPJ).
Increasing income tax and accession tax on wealthy citizens are under consideration. The income tax system formerly had 19 levels and its maximum marginal rate was 70%. In order to stimulate Japan’s economic recovery, the tax rate on high-income earners has been kept lower, and the entire system now has only six levels. The maximum marginal rate on incomes over 18,000 thousand JPY (around 234 thousand USD) per year has stayed at only 40% until today (Asahi Newspaper, 2011/11/22). It seems that the redistributive character of the tax system is under threat.
Despite this, the increase of the consumption tax, which taxes daily consumption of average and even low income citizens, is now central to the agenda of political actors. After 2013 the consumption tax rate (now 5%) is going to be increased up to 10%, by two steps.
It is common sense to say that consumption tax system entails heavier burden on lower income earners. Thus increasing consumption tax rates would boost a sense of inequity about taxation among Japanese citizens. In response to it, the introduction of lower rates on essential goods, and a uniform cash payment for low income earners is considered. However, a high level authority in the government-official said that these measures for low income earners are unnecessary for a consumption tax system with 10%. Such measures for low income earners are commonly used in consumption tax systems over the last half of ten percents (Yomiuri Newspaper, 2011/11/10).
In this context, the idea of a cash benefit under the form of a refundable tax credit scheme for low income earners is discussed within an expert group of the Tax System Council of the government. Furthermore, an influential politician, who is said by many to be an expert of finance-tax systems, announced his intention to consider a refundable tax credit system in his platform during the 2008 presidential election of the Liberal Democratic Party (the former ruling party). These facts were revealed in the Newsletter of Basic Income Advocates Group, Japan (2011/11/26).
DPJ’s manifest for the last general election does not include any basic income idea and it seems that there is no real discussion on it within the party. Nonetheless, the DPJ first administration introduced a “child benefit” scheme paying 13,000 JPY (around 169 USD) per month regardless of the parents’ income (the actual amount was a half of the amount that they had promised in their platform). Although its unconditionality leads to the idea of a universal basic income, the DPJ was not aware of it, and they have already accepted to reform the scheme in order to introduce an income-test, due to pressure from the opposition parties.
Another main attraction in their manifesto was the integration of public pension systems, and the idea of funding a Guaranteed Minimum Pension (70,000 JPY, around 910 USD per month) with government’s fiscal revenues. This was an income security for elderly citizens but seems to be almost forgotten by the DPJ. Under these circumstances, the prospects of the refundable tax credit system for low income earners remain unclear.
What is made clear by these developments is that regardless whether the government openly favors basic income idea or not, the very idea of a basic income (even in partial or any other form) has become realistic, and is now an inevitable agenda item in the reform of Japan’s reformation of tax and transfer system.
