Japan fs Income Tax Base: Comparison with Other Countries and Estimation of Tax Reform

This paper shows that Japan fs income tax base is eroded mainly by the employment income deduction and social security benefits/contributions not being included in the tax base, through comparison with other countries, and how it is possible to increase income tax revenue by correcting these deductions with a simple estimation using tax affair statistics. Firstly, we re-estimate the trend in Japan fs income tax base presented in Morinobu and Nakamoto (2013), reflecting the revision of the benchmark year and retroactive adjustment of SNA. Even though the trend was adjusted downward by 2 or 3%, reflecting the downward adjustment of household receipts, the main causes of the erosion are the deductions for employment income and social security benefits/contributions under Japan fs aging society, in the same way as mentioned in Morinobu and Nakamoto (2013). These features of Japan fs income tax system are confirmed by both comparisons with the macro-estimated income tax base in the U.S. and with more-easily estimated income tax base of the average income class household in the U.S. and other European countries. Recently, the significance of one of the purposes of the employment income deduction, the adjustment to other incomes, has been decreasing, so it is necessary to review the employment income deduction to confine the feature to the deduction for approximate work-related costs. This paper estimates the amounts of increased tax revenue under the assumed reform in the employment income deduction. Tax revenue will increase 50%, with the reform in the employment income deduction, and additionally increase 10% with the extra reform in the deduction for the social security contributions. In short, it fs useful to review the employment income deduction to restore the income tax revenue, especially of the low and middle income brackets.