A paper published in the Ministry of Finance Policy Research Institute's "Financial Review" Issue 160. Professor Taro Ohno and his research team empirically analyzed the burden reduction and redistribution effects of various deductions in income tax using tax data.
Key Points
1. Research Overview
- Authors: Taro Ohno (Shinshu University), Shingo Okamoto (Tax College), Kazuhiro Inaba (Tax College/Ministry of Finance Policy Research Institute)
- Research Subject: Various deduction systems in Japan's income tax system
- Data Used: Individual filing income tax data (anonymized)
- Analysis Purpose: Quantitative evaluation of actual effects of deduction systems
2. Japan's Income Tax System and Its Evolution
- Basic Structure:
- Progressive tax rate structure based on comprehensive taxation
- Coexistence of various income deductions and tax credits
- Partial adoption of separate taxation system
- Historical Development:
- Development since the Shoup recommendations
- Trend toward reduced progressivity
- Increasing complexity of deduction systems
- International Comparative Perspective: More types of deductions compared to other countries
3. Data Characteristics
- Data Scale: Millions of tax return records
- Coverage: All taxpayers who filed returns
- Information Detail:
- Income breakdown (salary, business, real estate, etc.)
- All income deduction items
- Complete tax calculation process
- Data Limitations: Excludes salary earners with withholding tax only
4. Reality of Income, Deductions, and Tax Burden
- Income Distribution Characteristics:
- Concentration in middle and low-income brackets
- Small number of high-income earners
- Diversity of income sources
- Deduction Usage Reality:
- Universality of basic and spouse deductions
- Importance of social insurance premium deductions
- Selective use of medical expense deductions
- Effective Tax Rate Distribution: Actual tax burden rates after deductions
5. Burden Reduction Effect Analysis of Deductions
- Reduction Amount by Deduction:
- Social insurance premium deduction has the largest reduction effect
- Importance of dependent and spouse deductions
- Reduction patterns by income bracket
- Relationship with Marginal Tax Rates:
- Greater tax-saving effects for high-income earners
- Regressive aspects of income deductions
- Comparison with Tax Credits: Possibility of more equitable burden reduction
6. Redistribution Effects of Deductions
- Analysis Using Gini Coefficient:
- Income inequality before and after tax
- Difference in redistribution effects with and without deductions
- International positioning
- Redistribution Effects by Deduction Type:
- Universal effect of basic deduction
- Interaction with progressive tax rates
- Problems with deductions for high-income earners
- Simulation Analysis: Impact assessment of deduction abolition/reform
7. Policy Implications
- Review of Deduction System:
- Discussion on transition from income deductions to tax credits
- Simplification and rationalization of deductions
- Consideration of refundable tax credits
- Improving Equity:
- Improvement of vertical equity
- Ensuring horizontal equity
- Implications for System Design: Evidence-based reform proposals
8. Conclusions and Future Challenges
- Major Findings:
- Complex redistribution effects of deduction systems
- Gap between intentions and results
- Necessity and direction of reform
- Research Contributions:
- First comprehensive empirical analysis
- Provision of concrete data for policy discussions
- Future Research Topics:
- Comprehensive analysis including withholding taxpayers
- Verification of dynamic effects
- Analysis of behavioral changes
This research comprehensively reveals for the first time the reality of Japan's income tax deduction system and provides groundbreaking results offering essential empirical foundations for future tax reform discussions.