A drastic change in Japan’s tax system to encourage greater workforce participation by women could have been an effective prescription to addressing a labor shortage in the rapidly aging country.
But a revision to the spousal tax deduction system is likely to be a minor one in this year’s tax system reform plan, due mainly to opposition from within the ruling parties, despite eagerness expressed by Prime Minister Shinzo Abe.
“We will encourage women to work without making adjustment,” Abe told a meeting of the government’s tax commission on Sept 9. “We would like to create a (tax) system which is neutral to various ways of working.”
The spousal tax deduction system imposes a 1.03 million yen annual limit on spousal earnings for households to qualify for the tax break.
Though the system was introduced in 1961 to support housewives, it has been criticized for discouraging women from working long hours so they can be eligible for the tax break.
Under the system, taxpayers can claim a special deduction of 380,000 yen from their taxable income if their spouse earns no more than 1.03 million yen a year.
The revision to the spousal tax deduction system was seen as a key policy objective of the prime minister to promote more women to join social and business activities, as Abe set up a new panel last month to reform the country’s working practices.
“The biggest challenge in the Japanese economy is a declining potential growth rate,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co, adding that what the country needs is a policy to fully utilize the existing labor force.
“The spousal tax deduction system should be scrapped in order to address this issue, but it is disappointing to have backed away from such a move,” Kodama said.
According to government data in 2012, employment income of married women from 30 to 60 years old concentrated around 1 million yen, indicating that they are adjusting labor.
The Japan Association of Corporate Executives, or Keizai Doyukai, has proposed the government scrap the spousal tax deduction, arguing 1 trillion yen in additional tax revenue to be generated by ending the tax break should be used to help raise children to addres low birthrates.
“To revitalize the Japanese economy, we have to increase our labor force,” said Yoshio Sato, head of the business lobby’s Fiscal and Tax Reform Committee. “Since our country cannot actively accept immigrants, we have to utilize the potential workforce at home.”
Prior to full-fledged discussions, the tax commission chief of Abe’s ruling Liberal Democratic Party, Yoichi Miyazawa, indicated willingness to bring a “major revision” to the system. “Review of the spousal deduction is one of the pillars,” he said on Aug 30.
LDP policy chief Toshimitsu Motegi displayed a more positive stance, calling for the introduction of an income tax system which does not set a limit on spouses’ income and having the shift reflected in a tax system reform plan for fiscal 2017 starting April.
But Tetsuo Saito, tax commission chief of the LDP’s coalition partner Komeito, expressed a cautious view. “We need thorough discussions,” he said in an interview with Kyodo News on Sept 23. “It is absolutely unacceptable to have the issue decided hastily.”
The party was apparently worried about an increased burden on households with homemakers, who are key supporters for Komeito, with speculation looming that Abe could call a snap election as soon as January.
Some LDP lawmakers were also cautious as the new system would increase tax payment among their supporters and stuck with the view that wives should stay home rather than work outside.
“We need more time to persuade our female supporters,” a senior Komeito lawmaker said.
On Thursday, Miyazawa expressed the view that shifting the spousal tax deduction system to a new one will be difficult, citing there are “many challenging issues.” But he reiterated his willingness to overhaul the current system in the future.
Now the 55-year-old spousal tax deduction system is likely to remain in place with a minor change, with the limit on spousal earnings lifted to around 1.5 million yen or above, exceeding the 1.3 million yen line, which obliges spouses pay for social security premiums.
“As Prime Minister Abe has a very strong government base, he needs to exercise his strong leadership to realize major reforms in structural reforms,” but there has been little progress recently, said Kodama of Meiji Yasuda, questioning his seriousness in conducting reforms.
Kodama also pointed to a problem that many elections in the country are depriving lawmakers of incentives to conduct structural reforms, which needs a long-range perspective.
“Even the Abe government cannot escape from such a spell,” Kodama said. “Most lawmakers are worried about whether they can win the next election and reluctant to move forward reforms from long-term standpoint.”