Japan Mulls Comprehensive Income Tax Reforms

by Mary Swire, Tax-News.com, Hong Kong

23 June 2005

The Japanese government is examining proposals for a radical overhaul of the tax system that aims to cut down on tax avoidance and bring more workers and citizens into higher rate tax bands, possibly as early as next year.

According to the governments advisory panel on tax reform, drastic revenue raising measures are needed if Japan is to meet the challenges of a rapidly ageing population in a country with one of the world's lowest birth rates.

Presently, Japan's budget deficit is running at 5% of gross domestic product, while its gross debt, at 160% of GDP, is the highest of any industrialised nation. As sluggish economic growth has suppressed tax revenues, the government has been forced to issue bonds to cover 40% of its expenditure.

To help cure its fiscal ills, Hiromitsu Ishi, head of the governmental tax panel, wants to increase the top rate of income tax to 40% from 37%, and bring more workers into the middle tax bracket. At present eight out of ten of Japan's salaried workers pay tax at a rate of 10%.

Ishi also wants to see the phasing out of many types of tax exemptions. These include those afforded to housewives, retirees, and so-called 'parasite' singles, or those who continue to live with their parents well into their 30s.

A longer term goal of the tax panel is to see the 5% consumption tax increased to a rate similar to that charged in European countries, which typically ranges from 15% to 25%.

However, Prime Minister JUnichiro Koizumi has publicly declared that this tax will not be increased while he remains in office.

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