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---

### Introduction
- Since 2020, Japan implemented sizeable fiscal stimulus in response to the COVID-19 pandemic, leading to wider fiscal deficits, an unprecedented level of public debt, and rising demographic pressures that point to a need for medium-term fiscal consolidation once the recovery is established.
- Key structural considerations:
  - Social security spending is set to grow as the population ages.
  - Japan’s non-social security spending is already low among advanced economies.
  - Japan’s tax revenue in percent of GDP is low relative to other G7 countries.
- Distributional context:
  - Market income inequality in Japan has been on the rise (Colacelli and Anh, 2018), making Japan close to the average of G7 economies.
  - The pandemic likely exacerbated inequality (Kikuchi et al., 2021).
  - Redistributive effects of the tax system (including the social security premium) in Japan are limited relative to other advanced economies (OECD, 2008).
  - Wealth distribution matters because retirees—who often live on low incomes but with large wealth—account for a growing share of the population.
- Paper objectives:
  - Identify tax reform options to either increase revenues or strengthen redistributive effects.
  - Analyze the distributional effects of those measures considering household heterogeneity in income and wealth using an arithmetic micro-simulation model based on household survey data (KHPS).

### Tax reform options (listed by the paper)
- Unify the consumption tax reduced rate of 8 percent with the standard rate of 10 percent.
- Raise the consumption tax standard rate from 10 to 15 percent.
- Introduce a Consumption Tax Credit.
- Eliminate the preferential treatment for residential land embedded in the Fixed Asset Tax.
- Streamline the Employment Income Deductions in the personal income taxes.
- Streamline the Pension Income Deductions in the personal income taxes.
- Raise the capital income tax rate from 20 to 25 percent.

### Tax revenue and composition (key statistics and observations)
- Japan’s tax revenues including social security contributions were 31 percent of GDP in 2019.
- Social security contributions account for 41 percent of Japan’s tax revenues.
- The share of goods and services taxes (mainly the consumption tax) in Japan is lower than in other G7 countries except the U.S., suggesting room for further revenue increase.
- Property tax revenue’s share in Japan is on the lower end among G7 countries.

### Consumption tax: rationale, history, and distributional considerations
- Timeline of consumption tax rate changes in Japan:
  - Introduced in 1989 at 3 percent.
  - Increased to 5 percent in April 1997.
  - Increased to 8 percent in April 2014.
  - Increased to 10 percent in October 2019.
- Advantages of the consumption tax:
  - Serves as a stable source of revenue.
  - Distortionary effects on labor, saving, and investment are limited compared to income taxes.
  - Distributes tax burden equitably across generations (Keen et al., 2011).
- IMF staff model-based finding:
  - The consumption tax rate needs to reach 15 percent by 2030 if the rising cost of aging is to be financed by the consumption tax (McGrattan et al., 2018).
- Reduced rate policy and distributional implications:
  - A reduced rate of 8 percent (applicable to food, non-alcoholic beverages, and newspapers) was introduced in October 2019 to protect the vulnerable.
  - Evidence from household survey data for the first quarter after introduction (the fourth quarter of 2019): the share of spending on goods subject to the reduced rate in total spending was highest for the bottom income quintile, but in absolute amounts the top income quintile spent twice as much on those goods as the bottom income quintile.
  - The reduced rate results in large revenue foregone and is a blunt instrument to protect low-income households.
- Policy alternatives and efficiency considerations:
  - Replace the reduced rate with more targeted support such as a refundable tax credit scheme.
  - Merging the reduced rate with the standard rate could improve efficiency by alleviating administration costs and reducing distortions in firms’ input choices and consumers’ spending decisions (Mirrlees et al., 2011; Acosta-Ormaechea and Morozumi, 2019).
- Peer example:
  - Canada’s GST/HST Credit (introduced in 1991) is a quarterly cash transfer targeted at low- and modest-income households intended to offset all or part of the GST/HST they pay. Transfer amount is flat until household income reaches an income threshold of about 39 thousand CAD, with different treatment for single households.

### Property taxation: current design, issues, and reform rationale
- Japan imposes a standard statutory Fixed Asset Tax rate of 1.4 percent on immovable properties (land, buildings, and depreciable assets); an additional 0.3 percent is levied in urban areas as the City Planning Tax.
- Revenues from property taxes on buildings and land are about 2 percent of GDP in 2020, placing Japan third from the bottom among the G7 countries.
- Effective taxation of small residential land plots is substantially lower than the statutory rate:
  - Taxable values of residential land plots smaller than 200m2 are heavily discounted from assessed values; discount factors are 1/6 for land up to 200m2 and 1/3 for land exceeding 200m2.
  - Effective tax rate of small residential land plots is about 0.2 percent (versus the standard statutory rate of 1.4 percent).
- Identified justifications for gradually eliminating preferential treatment for residential land:
  - A tax on immovable property is growth-friendly because its immovable nature limits distortionary effects on investment decisions.
  - Low effective tax rates on residential land could contribute to a rise in unoccupied houses in urban areas by encouraging owners to retain preferential status even when not using properties.
  - Raising holding costs could incentivize owners to put properties to productive uses.
  - The current size-based concession (threshold at 200m2) is not well-targeted at vulnerable households because many urban high-value residential plots fall within the small-land threshold.
- Other property-related taxes:
  - Inheritance and gift tax revenues in Japan are already higher than other G7 countries except France, indicating limited scope for additional revenue from these taxes.
- Institutional valuation chain and parameters:
  - Land Market Value: reference value released annually by the Ministry of Land, Infrastructure, Transport and Tourism.
  - Assessed value: municipalities assess values of land at about 70 percent of the Land Market Value.
  - Taxable value: discounted from assessed value (discount factors above).
  - Effective tax rate formula used in analysis: Effective tax rate = Taxable value * 1.4% / Assessed value.

### Personal income tax: structure, deductions, and potential reforms
- PIT features a progressive schedule with a top statutory rate of about 55 percent (national top rate 45 percent plus 10 percent Resident Tax imposed by local governments).
- PIT revenues are the lowest among G7 countries, mainly due to generous deductions that erode the taxable base.
- Employment Income Deduction (EID):
  - EID amount starts at 0.55 million JPY and increases with employment income until reaching the ceiling of 1.95 million JPY.
  - Reform proposal: lower the EID ceiling to 1.5 million JPY (about three-fourths of the current level) to expand the tax base without hurting low-income households.
  - Historical note: In 2018, the EID amount was reduced by 0.1 million JPY while expanding the Basic Exemption by the same amount; the ceiling was lowered from 2.2 to 1.95 million JPY except for households with children.
- Public Pension Income Deduction (PID):
  - PID starts at 1.1 million JPY and rises with pension income until the ceiling of 1.95 million JPY.
  - About three-fourths of pension benefits is estimated to be exempt from taxable income largely due to the PID.
  - Reform proposal: set the PID on par with the post-reform EID (from 0.55 million JPY with a proposed ceiling of 1.5 million JPY) to prevent further base erosion as the number of pensioners rises.
- Capital income taxation:
  - Under the dual-income tax principle, capital gains, dividends of listed firms, and interest are subject to a flat rate of 20 percent in Japan, with exemptions intended to promote household financial investments through the NISA.
  - The share of capital income increases with household income; because capital income is taxed at a lower rate than top labor income, the tax burden declines once annual income exceeds about 100 million JPY.
  - Anti-evasion/avoidance measures suggested: make use of the My Number scheme, the Automatic Exchange of Information with overseas jurisdictions, and reporting requirements for those with large overseas wealth.

### Micro-simulation model: data, methodology, and key distributional findings
- Data source and sample:
  - KHPS 16th wave conducted in January 2019 used.
  - Out of 2,572 individuals surveyed, 2,378 individuals responded (collection rate of 93 percent).
  - After dropping 196 unreliable samples, data for 2,186 individuals (2,186 households) are used.
  - The Gini coefficient of equivalent disposable income in the dataset is 0.296 (comparisons: 0.288 reported by the Statistics Bureau of Japan for 2019 and 0.334 reported by the OECD based on CSLC for 2018).
- Income, wealth, and tax calculations:
  - Individual incomes summed to obtain household gross income; households are divided into deciles based on equivalent gross income (gross income divided by the square root of household size).
  - Wealth distribution captured by dividing households into quintiles based on equivalent net worth (real and financial assets less borrowings, divided by the square root of household size).
  - Taxes and social security premiums applied as of FY2021 to individual incomes, household expenditures, and wealth to estimate theoretical taxes and social security premiums.
  - Taxes and premiums included in the model:
    - Personal Income Tax (PIT)
    - Resident Tax
    - Consumption Tax
    - Fixed-Asset Tax
    - Pension, healthcare/long-term care, and employment insurance premiums
  - Tax burden ratio = (taxes + social security premiums) / gross income.
- Key distributional results under current policies:
  - Average tax burden by income decile ranges from 19 percent for the bottom income decile to 26 percent for the top decile.
  - Component patterns:
    - PIT and Resident Tax are progressive.
    - Consumption Tax, Fixed Asset Tax, and healthcare insurance premium are regressive.
    - Pension insurance premium burden is hump-shaped: light for top two deciles due to Employees' Pension Insurance premium ceiling; light for bottom two deciles due to a large share of retirees who do not pay premiums.
  - By wealth quintile:
    - Tax burden for the bottom wealth quintile is comparable to or higher than that in the middle three quintiles, reflecting heterogeneity (some bottom-wealth households have high incomes but large borrowings).
    - The top wealth quintile shows a smaller burden of pension insurance premium, consistent with a larger share of retirees (average age of household head is high in the top quintile).
  - Interaction of income deciles and wealth quintiles:
    - Divergence of tax burden across wealth quintiles is most pronounced in the bottom income decile; example: the top wealth quintile in the bottom income decile shows a tax burden high at about 30 percent due in part to reporting large capital losses that reduced income denominators.
- Micro-simulation exercise:
  - The simulation is static, assuming no behavioral response to policy changes.
  - Reform options are implemented by changing parameters/formulas (tax rates, deduction ceilings, etc.) and recalculating average tax burdens by income decile and wealth quintile for comparison with current policies.

### Simulation Results — Summary of policy options and distributional impacts
- A. Unify the Reduced Consumption Tax Rate with the Standard Rate
  - Current consumption tax: standard rate 10 percent, reduced rate 8 percent (reduced rate applicable to foods, non-alcoholic beverage, and newspapers).
  - Elimination of the reduced consumption tax rate raises the tax burden of the bottom income decile by about 0.5 percentage points.
  - Impact is comparable across wealth quintiles in each income decile.

- B. Raise the Consumption Tax Rate to 15 percent without the Reduced Rate
  - Raise the rate (both standard and reduced) to 15 percent.
  - Increase to 15 percent raises the tax burden of the bottom income decile by about 4 percentage points, while the tax burden of the top income decile rises by about 1 percentage point.
  - In lower income deciles (I and II), the rise in tax burden is larger for wealthy households within the same income decile.

- C. Introduce a Consumption Tax Credit (illustrative design)
  - Annual full benefits: 80 thousand JPY for single households; 100 thousand JPY for couples.
  - Top-up benefit: 30 thousand JPY for each child below the age of 19.
  - Income threshold for full benefit: 3.5 million JPY.
  - Benefit phase-out rate: 5 percent.
  - Tax burden of the bottom income decile declines by about 6 percentage points.
  - Impact is broadly comparable between wealthy and non-wealthy households in each income decile.
  - Administrative challenges: Canada’s GST Credit builds on annual tax returns, while most employees in Japan do not file annual tax returns.

- D. Eliminate the Preferential Treatment for Residential Land in Fixed Asset Tax
  - Eliminating preferential treatment raises the tax burden of the bottom income decile by about 1½ percentage points.
  - Change for the top income decile is about 0.3 percentage point.
  - Wealthiest households in the bottom income decile see an increase of about 8 percentage points.
  - In the bottom income decile, households with least wealth face larger incremental tax burdens than those with the second least wealth because the former often have both real estate assets and borrowings.
  - Incidence caveat: if higher tax burden is passed on to renters, incidence could fall on renters and reduce disparity between wealthy and non-wealthy households.

- E. Streamline the Employment Income Deduction (EID)
  - Lower the ceiling of the EID from 1.95 million JPY to 1.5 million JPY; Resident tax reformed accordingly.
  - Lowering the EID ceiling raises the tax burden of the top income decile by about 1 percentage point.
  - Low-income households are largely unaffected.

- F. Streamline the Pension Income Deduction (PID)
  - Lower the PID floor from 1.1 million JPY to 0.55 million JPY and the ceiling from 1.95 million JPY to 1.5 million JPY; Resident tax reformed accordingly.
  - Streamlining raises Personal Income Tax and Resident Tax notably for the second income decile.
  - Bottom income decile is less affected because the new PID floor (0.55 million JPY) still covers a majority of their low pension income.
  - Impact is larger for wealthy households than for non-wealthy households in the same income decile.
  - Simulation assumption: No change in healthcare insurance premiums for pensioners is simulated.

- G. Raise the Capital Income Tax Rate to 25 percent
  - Raise capital income tax rate from 20 percent to 25 percent.
  - Increasing the capital income tax rate has little effect across income deciles and wealth quintiles, with a 0.04-percentage point increase even for the top income decile.
  - Small effect reflects a small share of capital incomes in gross income across households.
  - Data caveat: small observed shares of capital income could be due to under-reporting.

- H. Implement Every Option (Combined Scenario)
  - Implement all options simultaneously.
  - Tax burden for each income decile increases by 0 to 4 percentage points.
  - Consumption Tax Credit suppresses the rise in tax burden for low-income households, leaving the bottom income decile broadly unchanged.
  - Change in tax burden is significantly larger for those with wealth relative to those without wealth in the same income decile, especially in low- to modest-income deciles.

- I. Change in Gini Coefficients
  - Baseline Gini coefficients:
    - Gini coefficient before reforms (Equivalent disposable income (A)): 0.296
    - Gini coefficient before reforms (Adjusted equivalent disposable income (B)): 0.303
  - Changes in Gini coefficient after each option:
    - Unify the reduced consumption tax rate with the standard rate: (A) -0.001
    - Raise the consumption tax rate (both standard and reduced) to 15 percent: (A) -0.005
    - Introduce a Consumption Tax Credit: (B) -0.006
    - Eliminate the preferential treatment for residential land in Fixed Asset Tax: (A) 0.002; (B) 0.002
    - Lower the ceiling of the Employment Income Deduction in personal income taxes: (A) -0.002; (B) -0.002
    - Lower the floor and the ceiling of the Pension Income Deduction in personal income taxes: (A) 0.001; (B) 0.001
    - Raise the capital income tax rate from 20 to 25 percent: (A) -0.000; (B) -0.000
  - Gini coefficients after implementation of every option:
    - Gini coefficient after implementation of every option (Equivalent disposable income (A)): 0.297
    - Gini coefficient after implementation of every option (Adjusted equivalent disposable income (B)): 0.302
  - Interpretation:
    - Unification of the reduced consumption tax rate, the consumption tax rate increase, elimination of preferential treatment for residential land, and streamlining of the PID increase Gini coefficients (regressive effects).
    - These regressive effects are offset by introduction of the Consumption Tax Credit, lowering the ceiling of the EID, and a rise in the capital income tax rate, resulting in little change in Gini coefficients when every option is implemented.

### Appendix — Methodology overview and key parameters
- Data and income categories:
  - KHPS 2019 asks amounts of 11 income categories in 2018 for respondent, spouse, and aggregates of other family members (i–xi listed in source).
  - Annual employment incomes divided into bonuses and monthly salaries using KHPS bonus information.
  - Household gross income = sum of respondent, spouse, other family members, and capital gains.
- Sample exclusions and cleaning:
  - A household’s gross income is below 200 thousand JPY.
  - A household’s total expenditure is more than double of a household’s gross income.
  - A household’s total expenditures is zero.
  - A respondent’s market income is below his/her bonus.
  - A spouse’s market income is below his/her bonus.
  - Result: 192 out of 2,370 samples are dropped.
- Wealth measurement:
  - Household real assets = reported market values of houses and land plots (primary residences only).
  - Household net worth = real assets + financial assets − borrowings.
- Tax and social security calculations (selected mechanics):
  - Apply EID and PID to employment and pension incomes respectively; apply Social Insurance Premium Deductions, Basic Exemption, Exemption for Dependents, Spousal Exemption.
  - Resident Tax: apply standard rate of 10 percent to taxable income after deductions/exemptions, plus standard per-capita levy of 5 thousand JPY.
  - Consumption tax: KHPS January 2019 expenditures annualized; a (Food) subject to reduced rate of 8 percent; standard rate 10 percent applied to remaining taxable items.
  - Fixed Asset Tax: use KHPS appraised values; land: discount appraised values by one-sixth for plots up to 200m2, and one-third for plots exceeding 200m2; apply standard tax rate of 1.4 percent.
  - Capital gains tax: flat tax rate of 20 percent applied to capital gains (15 percent PIT, 5 percent Resident Tax).
  - Social security premiums: pension premiums, healthcare and long-term care premiums, employment insurance premium (employment insurance premium: 0.3 percent of employment income).
- Public pension and health system parameters (as used in the model):
  - National Pension (Category 1): fixed contribution of 16,340 JPY per month; basic pension of 779,300 JPY per year (full benefit).
  - Employees' Pension Insurance (EPI) contributions linked to income (18.3% of monthly wage and bonus); half paid by employers; eligibility criteria noted.
  - Assumptions on healthcare insurance coverage and premium schedules (JHIA Tokyo Metropolitan Area for JHIA; Nakano-Ward schedule for NHI).
- Tax burden and disposable income definitions:
  - Tax burden ratio per tax item = (tax amount for item) / (household gross income).
  - Total tax burden ratio = sum of tax burden ratios of PIT, Resident Tax, consumption tax, Fixed Asset Tax, healthcare premium (including long-term care premium), pension premium, and employment insurance premium.
  - Reported average tax burden ratios by age group (percentiles and means listed in source).
  - Household disposable income = household gross income − (Personal Income Tax + Resident Tax + Fixed Asset Tax + social security premiums).

*Italic: Source — IMF Working Paper “Distributional Effects of Tax Reforms in Japan” (wpiea2022150-print-pdf).*

### 1. Introduction ........................................................................................................

### IMF WORKING PAPERS  Distributional Effects of Tax Reforms in Japan

### Introduction
- Since 2020, Japan implemented sizeable fiscal stimulus in response to the COVID-19 pandemic, leading to wider fiscal deficits, an unprecedented level of public debt, and rising demographic pressures that point to a need for medium-term fiscal consolidation once the recovery is established.
- Key structural considerations:
  - Social security spending is set to grow as the population ages.
  - Japan’s non-social security spending is already low among advanced economies.
  - Japan’s tax revenue in percent of GDP is low relative to other G7 countries.
- Distributional context:
  - Market income inequality in Japan has been on the rise (Colacelli and Anh, 2018), making Japan close to the average of G7 economies.
  - The pandemic likely exacerbated inequality (Kikuchi et al., 2021).
  - Redistributive effects of the tax system (including the social security premium) in Japan are limited relative to other advanced economies (OECD, 2008).
  - Wealth distribution matters because retirees—who often live on low incomes but with large wealth—account for a growing share of the population.
- Paper objectives:
  - Identify tax reform options to either increase revenues or strengthen redistributive effects.
  - Analyze the distributional effects of those measures considering household heterogeneity in income and wealth using an arithmetic micro-simulation model based on household survey data (KHPS).

### Tax reform options (listed by the paper)
- Unify the consumption tax reduced rate of 8 percent with the standard rate of 10 percent.
- Raise the consumption tax standard rate from 10 to 15 percent.
- Introduce a Consumption Tax Credit.
- Eliminate the preferential treatment for residential land embedded in the Fixed Asset Tax.
- Streamline the Employment Income Deductions in the personal income taxes.
- Streamline the Pension Income Deductions in the personal income taxes.
- Raise the capital income tax rate from 20 to 25 percent.

### Tax revenue and composition (key statistics and observations)
- Japan’s tax revenues including social security contributions were 31 percent of GDP in 2019.
- Social security contributions account for 41 percent of Japan’s tax revenues.
- The share of goods and services taxes (mainly the consumption tax) in Japan is lower than in other G7 countries except the U.S., suggesting room for further revenue increase.
- Property tax revenue’s share in Japan is on the lower end among G7 countries.

### Consumption tax: rationale, history, and distributional considerations
- Timeline of consumption tax rate changes in Japan:
  - Introduced in 1989 at 3 percent.
  - Increased to 5 percent in April 1997.
  - Increased to 8 percent in April 2014.
  - Increased to 10 percent in October 2019.
- Advantages of the consumption tax:
  - Serves as a stable source of revenue.
  - Distortionary effects on labor, saving, and investment are limited compared to income taxes.
  - Distributes tax burden equitably across generations (Keen et al., 2011).
- IMF staff model-based finding:
  - The consumption tax rate needs to reach 15 percent by 2030 if the rising cost of aging is to be financed by the consumption tax (McGrattan et al., 2018).
- Reduced rate policy and distributional implications:
  - A reduced rate of 8 percent (applicable to food, non-alcoholic beverages, and newspapers) was introduced in October 2019 to protect the vulnerable.
  - Evidence from household survey data for the first quarter after introduction (the fourth quarter of 2019): the share of spending on goods subject to the reduced rate in total spending was highest for the bottom income quintile, but in absolute amounts the top income quintile spent twice as much on those goods as the bottom income quintile.
  - The reduced rate results in large revenue foregone and is a blunt instrument to protect low-income households.
- Policy alternatives and efficiency considerations:
  - Replace the reduced rate with more targeted support such as a refundable tax credit scheme.
  - Merging the reduced rate with the standard rate could improve efficiency by alleviating administration costs and reducing distortions in firms’ input choices and consumers’ spending decisions (Mirrlees et al., 2011; Acosta-Ormaechea and Morozumi, 2019).
- Peer example:
  - Canada’s GST/HST Credit (introduced in 1991) is a quarterly cash transfer targeted at low- and modest-income households intended to offset all or part of the GST/HST they pay. Transfer amount is flat until household income reaches an income threshold of about 39 thousand CAD, with different treatment for single households.

### Property tax: initial framing
- In most G7 countries, property tax revenues are mainly comprised of recurrent taxes on immovable property.
- In Japan, municipal governments levy a recurrent tax called the Fixed Asset Tax at a standard rate of... [content continues beyond provided excerpt].

_Italic: Source: IMF Working Paper — Distributional Effects of Tax Reforms in Japan (excerpt: Introduction and Tax Reform Options sections)._

### 1.4 percent on immovable properties―land, buildings, and depreciable assets. Additionally, the City Planning

### wpiea2022150-print-pdf - 1.4 percent on immovable properties―land, buildings, and depreciable assets. Additionally, the City Planning

### Property taxation: current design, issues, and reform rationale
- Japan imposes a standard statutory Fixed Asset Tax rate of 1.4 percent on immovable properties (land, buildings, and depreciable assets); an additional 0.3 percent is levied in urban areas as the City Planning Tax.
- Revenues from property taxes on buildings and land are about 2 percent of GDP in 2020, placing Japan third from the bottom among the G7 countries.
- Effective taxation of small residential land plots is substantially lower than the statutory rate:
  - Taxable values of residential land plots smaller than 200m2 are heavily discounted from assessed values; discount factors are 1/6 for land up to 200m2 and 1/3 for land exceeding 200m2.
  - Effective tax rate of small residential land plots is about 0.2 percent (versus the standard statutory rate of 1.4 percent).
- Identified justifications for gradually eliminating preferential treatment for residential land:
  - A tax on immovable property is growth-friendly because its immovable nature limits distortionary effects on investment decisions.
  - Low effective tax rates on residential land could contribute to a rise in unoccupied houses in urban areas by encouraging owners to retain preferential status even when not using properties.
  - Raising holding costs could incentivize owners to put properties to productive uses.
  - The current size-based concession (threshold at 200m2) is not well-targeted at vulnerable households because many urban high-value residential plots fall within the small-land threshold.
- Other property-related taxes:
  - Inheritance and gift tax revenues in Japan are already higher than other G7 countries except France, indicating limited scope for additional revenue from these taxes.
- Institutional valuation chain and parameters:
  - Land Market Value: reference value released annually by the Ministry of Land, Infrastructure, Transport and Tourism.
  - Assessed value: municipalities assess values of land at about 70 percent of the Land Market Value.
  - Taxable value: discounted from assessed value (discount factors above).
  - Effective tax rate formula used in analysis: Effective tax rate = Taxable value * 1.4% / Assessed value.

### Personal income tax: structure, deductions, and potential reforms
- Japan’s personal income tax (PIT) features a progressive schedule with a top statutory rate of about 55 percent (national top rate 45 percent plus 10 percent Resident Tax imposed by local governments).
- Despite the high top statutory rate, PIT revenues are the lowest among G7 countries, mainly due to generous deductions that erode the taxable base.
- Two large deductions identified for streamlining:
  - Employment Income Deduction (EID):
    - Intended as a work-related expenses tax allowance on an estimation basis.
    - The EID amount starts at 0.55 million JPY and increases with employment income until reaching the ceiling of 1.95 million JPY.
    - Reform proposal: lower the EID ceiling to 1.5 million JPY (about three-fourths of the current level) to expand the tax base without hurting low-income households.
    - Historical note: In 2018, the EID amount was reduced by 0.1 million JPY while expanding the Basic Exemption by the same amount; the ceiling was lowered from 2.2 to 1.95 million JPY except for households with children.
  - Public Pension Income Deduction (PID):
    - The PID starts at 1.1 million JPY and rises with pension income until the ceiling of 1.95 million JPY.
    - About three-fourths of pension benefits is estimated to be exempt from taxable income largely due to the PID.
    - The PID applies even to pensioners with large wealth, potentially exacerbating inter-generational inequality of wealth.
    - Reform proposal: set the PID on par with the post-reform EID (from 0.55 million JPY with a proposed ceiling of 1.5 million JPY) to prevent further base erosion as the number of pensioners rises.
- Capital income taxation:
  - Under the dual-income tax principle, capital gains, dividends of listed firms, and interest are subject to a flat rate of 20 percent in Japan, with exemptions intended to promote household financial investments through the NISA (Nippon Individual Savings Account).
  - The share of capital income increases with household income; because capital income is taxed at a lower rate than top labor income, the tax burden declines once annual income exceeds about 100 million JPY.
  - Cross-country comparisons show Japan’s marginal effective tax rates on various capital incomes are not high relative to peers, especially for high-income earners.
  - Anti-evasion/avoidance measures suggested: make use of the My Number scheme, the Automatic Exchange of Information with overseas jurisdictions, and reporting requirements for those with large overseas wealth.

### Micro-simulation model: data, methodology, and key distributional findings
- Data source and sample:
  - KHPS (Keio Household Panel Survey) 16th wave conducted in January 2019 used.
  - Out of 2,572 individuals surveyed, 2,378 individuals responded (collection rate of 93 percent).
  - After dropping 196 unreliable samples, data for 2,186 individuals (2,186 households) are used.
  - The Gini coefficient of equivalent disposable income in the dataset is 0.296 (comparisons: 0.288 reported by the Statistics Bureau of Japan for 2019 and 0.334 reported by the OECD based on CSLC for 2018).
- Income, wealth, and tax calculations:
  - Individual incomes summed to obtain household gross income; households are divided into deciles based on equivalent gross income (gross income divided by the square root of household size).
  - Wealth distribution captured by dividing households into quintiles based on equivalent net worth (real and financial assets less borrowings, divided by the square root of household size).
  - Taxes and social security premiums applied as of FY2021 to individual incomes, household expenditures, and wealth to estimate theoretical taxes and social security premiums.
  - Taxes and premiums included in the model:
    - Personal Income Tax (PIT)
    - Resident Tax
    - Consumption Tax
    - Fixed-Asset Tax
    - Pension, healthcare/long-term care, and employment insurance premiums
  - Tax burden ratio = (taxes + social security premiums) / gross income.
- Key distributional results under current policies:
  - Average tax burden by income decile ranges from 19 percent for the bottom income decile to 26 percent for the top decile.
  - Component patterns:
    - PIT and Resident Tax are progressive.
    - Consumption Tax, Fixed Asset Tax, and healthcare insurance premium are regressive.
    - Pension insurance premium burden is hump-shaped: light for top two deciles due to Employees' Pension Insurance premium ceiling; light for bottom two deciles due to a large share of retirees who do not pay premiums.
  - By wealth quintile:
    - Tax burden for the bottom wealth quintile is comparable to or higher than that in the middle three quintiles, reflecting heterogeneity (some bottom-wealth households have high incomes but large borrowings).
    - The top wealth quintile shows a smaller burden of pension insurance premium, consistent with a larger share of retirees (average age of household head is high in the top quintile).
  - Interaction of income deciles and wealth quintiles:
    - Divergence of tax burden across wealth quintiles is most pronounced in the bottom income decile; example: the top wealth quintile in the bottom income decile shows a tax burden high at about 30 percent due in part to reporting large capital losses that reduced income denominators.
- Micro-simulation exercise:
  - The simulation is static, assuming no behavioral response to policy changes.
  - Reform options are implemented by changing parameters/formulas (tax rates, deduction ceilings, etc.) and recalculating average tax burdens by income decile and wealth quintile for comparison with current policies.
  - Table 2 in the source lists the reform options simulated.

*Italic: Source — IMF Working Paper “Distributional Effects of Tax Reforms in Japan” (wpiea2022150-print-pdf).*

### 4. Simulation Results

### 4. Simulation Results

### A. Unify the Reduced Consumption Tax Rate with the Standard Rate
- Policy options and baseline:
  - Current consumption tax: standard rate 10 percent, reduced rate 8 percent (reduced rate applicable to foods, non-alcoholic beverage, and newspapers).
  - Option: Unify the reduced rate with the standard rate.
- Distributional findings:
  - Elimination of the reduced consumption tax rate raises the tax burden of the bottom income decile by about 0.5 percentage points.
  - Impact is comparable across wealth quintiles in each income decile because expenditures on necessity goods subject to the reduced rate do not differ much between wealthy and non-wealthy households.

### B. Raise the Consumption Tax Rate to 15 percent without the Reduced Rate
- Policy option:
  - Raise the rate (both standard and reduced) to 15 percent (i.e., eliminate reduced rate and set overall rate to 15 percent).
- Distributional findings:
  - Increase to 15 percent raises the tax burden of the bottom income decile by about 4 percentage points, while the tax burden of the top income decile rises by about 1 percentage point.
  - In lower income deciles (I and II in particular), the rise in tax burden is larger for wealthy households within the same income decile because wealthy households tend to consume more non-necessity goods and services.

### C. Introduce a Consumption Tax Credit
- Policy design (illustrative, GST Credit equivalent):
  - Annual full benefits: 80 thousand JPY for single households; 100 thousand JPY for couples.
  - Top-up benefit: 30 thousand JPY for each child below the age of 19.
  - Income threshold for full benefit: 3.5 million JPY.
  - Benefit phase-out rate: 5 percent (i.e., the benefit declines by 5 JPY when income increases by 100 JPY).
- Distributional findings:
  - Consumption Tax Credit is a quarterly cash transfer targeted at low- and modest-income households to offset consumption tax.
  - Tax burden of the bottom income decile declines by about 6 percentage points.
  - Impact is broadly comparable between wealthy and non-wealthy households in each income decile.
- Implementation note:
  - Administrative challenges could emerge because Canada’s GST Credit builds on annual tax returns, while most employees in Japan do not file annual tax returns.

### D. Eliminate the Preferential Treatment for Residential Land in Fixed Asset Tax
- Policy option:
  - Eliminate the preferential treatment for residential land (Fixed Asset Tax currently treats only a fraction of assessed values as taxable values for residential land).
- Distributional findings:
  - Raises the tax burden of the bottom income decile by about 1½ percentage points.
  - Change for the top income decile is about 0.3 percentage point.
  - Stark contrast by wealth within deciles: the wealthiest households in the bottom income decile see an increase of about 8 percentage points.
  - In the bottom income decile, households with least wealth face larger incremental tax burdens than those with the second least wealth because the former often have both real estate assets and borrowings.
- Incidence caveat:
  - If land-owners’ higher tax burden is passed on to renters, tax incidence could fall on renters and reduce disparity between wealthy and non-wealthy households.

### E. Streamline the Employment Income Deduction (EID)
- Policy option:
  - Lower the ceiling of the EID from 1.95 million JPY to 1.5 million JPY. Resident tax is reformed accordingly.
  - Current EID starts at 0.55 million JPY and increases with employment income until ceiling of 1.95 million JPY.
- Distributional findings:
  - Lowering the EID ceiling raises the tax burden of the top income decile by about 1 percentage point.
  - Low-income households are largely unaffected.
  - Impact is broadly comparable between wealthy and non-wealthy households in the same income decile.

### F. Streamline the Pension Income Deduction (PID)
- Policy option:
  - Lower the PID floor from 1.1 million JPY to 0.55 million JPY and the ceiling from 1.95 million JPY to 1.5 million JPY. Resident tax is reformed accordingly.
  - Current PID starts at 1.1 million JPY and rises with pension income until ceiling of 1.95 million JPY.
- Distributional findings:
  - Streamlining raises Personal Income Tax and Resident Tax notably for the second income decile.
  - Bottom income decile is less affected because the new PID floor (0.55 million JPY) still covers a majority of their low pension income.
  - Impact is distinctively larger for wealthy households than for non-wealthy households in the same income decile because the share of pensioners is higher in the top wealth quintile.
- Simulation assumption:
  - No change in healthcare insurance premiums for pensioners is simulated because it is assumed the healthcare insurance system would adjust so pensioners do not face higher premiums due to a reduction in the PID.

### G. Raise the Capital Income Tax Rate to 25 percent
- Policy option:
  - Raise capital income tax rate from 20 percent to 25 percent (capital gains, dividends of listed firms, and interests are subject to a flat rate of 20 percent under current policy).
- Distributional findings:
  - Increasing the capital income tax rate has little effect across income deciles and wealth quintiles, with a 0.04-percentage point increase even for the top income decile.
  - Small effect reflects a small share of capital incomes in gross income across households.
  - Within income deciles, those with large wealth tend to face higher tax burdens than those with little wealth, but by a small margin.
- Data caveat:
  - Small observed shares of capital income could be due to under-reporting; Japan National Tax Authorities’ data also show a small share of capital incomes.

### H. Implement Every Option (Combined Scenario)
- Combined simulation:
  - Implement all options simultaneously.
- Distributional findings:
  - Tax burden for each income decile increases by 0 to 4 percentage points.
  - Consumption Tax Credit suppresses the rise in tax burden for low-income households, leaving the bottom income decile broadly unchanged.
  - Change in tax burden is significantly larger for those with wealth relative to those without wealth in the same income decile, especially in low- to modest-income deciles — reflecting uneven impacts of the consumption tax rate increase and the Fixed Asset Tax reform.

### I. Change in Gini Coefficients
- Baseline Gini coefficients:
  - Gini coefficient before reforms (Equivalent disposable income (A)): 0.296
  - Gini coefficient before reforms (Adjusted equivalent disposable income (B)): 0.303
- Changes in Gini coefficient after each option (Column (A) = Equivalent disposable income; Column (B) = Adjusted equivalent disposable income):
  - Unify the reduced consumption tax rate with the standard rate: (A) -0.001
  - Raise the consumption tax rate (both standard and reduced) to 15 percent: (A) -0.005
  - Introduce a Consumption Tax Credit: (B) -0.006
  - Eliminate the preferential treatment for residential land in Fixed Asset Tax: (A) 0.002; (B) 0.002
  - Lower the ceiling of the Employment Income Deduction in personal income taxes: (A) -0.002; (B) -0.002
  - Lower the floor and the ceiling of the Pension Income Deduction in personal income taxes: (A) 0.001; (B) 0.001
  - Raise the capital income tax rate from 20 to 25 percent: (A) -0.000; (B) -0.000
- Gini coefficients after implementation of every option:
  - Gini coefficient after implementation of every option (Equivalent disposable income (A)): 0.297
  - Gini coefficient after implementation of every option (Adjusted equivalent disposable income (B)): 0.302
- Interpretation:
  - Unification of the reduced consumption tax rate, the consumption tax rate increase, elimination of preferential treatment for residential land, and streamlining of the PID increase Gini coefficients (regressive effects).
  - These regressive effects are offset by introduction of the Consumption Tax Credit, lowering the ceiling of the EID, and a rise in the capital income tax rate, resulting in little change in Gini coefficients when every option is implemented.

*Source: IMF staff (Simulation results summarized from "4. Simulation Results").*

### References

### References and Appendix. Calculation of Income, Wealth, Tax and Social Security Premiums

### References
- Bibliographic listings of works cited in the study, including IMF Working Papers, OECD publications, academic articles, and policy research from Japanese ministries and institutes. (Full reference list appears in the source.)

### Appendix — Methodology Overview
- The methodology broadly follows Kawade (2018) and Doi (2017).

A. Income
- Data source: KHPS 2019 asking amounts of 11 income categories in 2018 for respondent, spouse, and aggregates of other family members.
  - i. Annual employment income
  - ii. Self-employment, business, home-work income
  - iii. Rent income
  - iv. Interest and dividends
  - v. Remittances and gifts
  - vi. Public pension
  - vii. Corporate and personal pensions
  - viii. Unemployment benefits and child-care leave benefits
  - ix. Child allowances and childcare allowances (household total only)
  - x. Welfare benefits (household total only)
  - xi. Other income
- Annual employment incomes are divided into bonuses and monthly salaries using KHPS bonus information.
- Gross income per person = sum of i–xi for respondent and spouse.
- For other family members (only aggregate data available): divide i and ii by estimated number of members currently at work; divide vi and vii by estimated number of pensioners.
- Household gross income = sum of respondent, spouse, other family members, and capital gains.
- Sample exclusions (data cleaning):
  - A household’s gross income is below 200 thousand JPY (about 1.8 thousand USD)
  - A household’s total expenditure is more than double of a household’s gross income
  - A household’s total expenditures is zero
  - A respondent’s market income (sum of i, ii, iii, iv, v, xi) is below his/her bonus
  - A spouse’s market income is below his/her bonus
- Result of data cleaning: 192 out of 2,370 samples are dropped.

B. Wealth
- KHPS elicits market values of respondent’s houses and land plots (primary residences only).
- Household real assets = sum of reported market values of houses and land plots (if market values lower than appraised or missing, appraised values used).
- Financial assets include deposits and securities as defined in the KHPS questionnaire.
- Household net worth = real assets + financial assets − borrowings.

C. Tax and Social Security Premiums
- Taxable incomes: treat i–iv, vi, vii, and xi as taxable; treat v, viii, ix, and x as non-taxable.
- Steps to estimate PIT and Resident Tax per household member:
  - Calculate EID and subtract from i (Annual employment income).
  - Calculate PID and subtract from vi + vii (pension incomes).
  - Calculate Social Insurance Premium Deductions and personal exemptions, and subtract from taxable income:
    - The Basic Exemption
    - The Exemption for Dependents
    - The Spousal Exemption and Special Spousal Exemption
  - Apply stipulated PIT rate schedule to taxable income after deductions/exemptions; subtract Mortgage Tax Credit and Dividend Tax Credit where applicable.
  - Resident Tax: apply standard rate of 10 percent to taxable income after deductions/exemptions, plus standard per-capita levy of 5 thousand JPY; apply partial/full exemption if income below threshold.
- Qualifications/assumptions for Resident Tax:
  - Assume all local governments impose the standard rate set by national government.
  - Resident Tax is calculated based on annual income for 2018 (actual system uses previous year).
- Dividend treatment:
  - Assume iv (Interests and dividends) are all dividend incomes of listed firms.
  - Individuals choose to subsume dividend incomes into comprehensive income if taxable income is below 6.95 million JPY (to avoid facing a marginal rate higher than 20 percent on dividends).
- C-2. Consumption Tax
  - KHPS asks expenditures in January 2019 across 17 categories (a–q); annualize by multiplying January expenditure by 12.
  - Items assumed non-taxable: c (Rent, land rent, home repairs), d (Multi-family housing common charges), p (Remittances), one half of i (Healthcare), and one half of m (Education).
  - a (Food) subject to reduced rate of 8 percent.
  - Standard consumption tax rate of 10 percent applied to remaining items.
- C-3. Fixed Asset Tax
  - Use KHPS appraised values (assessed values).
  - Land: discount appraised values by one-sixth for plots up to 200m2, and one-third for plots exceeding 200m2; apply standard tax rate of 1.4 percent.
  - Houses: discount appraisal values by half if houses are recently built; apply tax rate of 1.4 percent.
  - Sum land and house tax amounts to obtain Fixed Asset Tax per household.
  - Urban Planning Tax not calculated due to lack of urban-area location data.
- C-4. Capital Gains Tax
  - Flat tax rate of 20 percent applied to capital gains (15 percent PIT, 5 percent Resident Tax).
- C-5. Social Security Premiums
  - Social security premiums = pension premium + healthcare and long-term care premiums + employment insurance premium.
  - Premium calculation differs by individual type: self-employed, employee of firms, or dependent spouse.
  - Public pension system categories and parameters (Table A.1):
    - Category 1: National Pension — fixed contribution of 16,340 JPY per month; basic pension of 779,300 JPY per year (full benefit).
    - Category 2: Employees' Pension Insurance (EPI) — contributions linked to income (18.3% of monthly wage and bonus); half paid by employers; eligibility: full-time over 30 hours; part-time eligible if over 20 hours and earn more than 88 thousand JPY per month (roughly equivalent to 1.06 million JPY per year) and employer has 500+ employees.
    - Category 3: Employees’ dependent spouses — dependents whose gross incomes are below 1.3 million JPY; no contribution; receive same benefits as Category 1.
    - Sources: Government of Japan, IMF staff compilations. Note: As of March 2019.
  - Healthcare assumptions:
    - Assume all eligible employees are insured by Japanese Health Insurance Association (JHIA); self-employed and pensioners by National Health Insurance (NHI).
    - Dependents of eligible employees exempt from healthcare premium payments.
    - For NHI, apply partial/full exemption if income below threshold.
    - All individuals aged 75 years and above move to Latter-Stage Elderly Healthcare System and pay a premium per prefecture schedule.
    - Use annual income in 2018 for NHI premiums calculation (actual system uses previous year).
    - Use JHIA Tokyo Metropolitan Area schedule for JHIA and Nakano-Ward schedule for NHI in the model.
  - Employment insurance premium: 0.3 percent of employment income (FY2021 rate schedule for general businesses).
  - For other household members (non-respondent/spouse) lacking detailed info:
    - Assume full-time employees are covered by EPI, JHIA, and Employment Insurance.
    - Others assumed dependent on household head.
  - Long-term care premiums:
    - No. 1 insured: aged 65+; No. 2 insured: aged 40–65.
    - Dependent spouses of eligible employees among No. 2 are exempt from premiums.
    - Long-term care premiums calculated and added accordingly.

D. Tax Burden Ratio and Disposable Income
- Tax burden ratio per tax item = (tax amount for item) / (household gross income).
- Total tax burden ratio = sum of tax burden ratios of Personal Income Tax, Resident Tax, consumption tax, Fixed Asset Tax, healthcare premium (including long-term care premium), pension premium, and employment insurance premium.
- Descriptive statistics of tax burden ratios are presented with a breakdown by six age groups.
- Reported average tax burden ratios by age group (in percent):
  - ~34: 25th percentile 18.8 ; Median 21.8 ; 75th percentile 24.3 ; Mean 21.8
  - 35~44: 25th percentile 19.5 ; Median 22.3 ; 75th percentile 25.2 ; Mean 22.4
  - 45~54: 25th percentile 21.4 ; Median 23.9 ; 75th percentile 26.6 ; Mean 24.2
  - 55~64: 25th percentile 19.6 ; Median 23.2 ; 75th percentile 26.2 ; Mean 22.9
  - 65~74: 25th percentile 14.9 ; Median 18.3 ; 75th percentile 22.0 ; Mean 18.7
  - 75~: 25th percentile 14.2 ; Median 18.3 ; 75th percentile 22.0 ; Mean 18.8
  - Total: 25th percentile 17.7 ; Median 21.7 ; 75th percentile 25.2 ; Mean 21.6
- Observed summary: average tax burden ratio of the elderly (over 65 years old) is lower than that of working-age households; highest mean observed for 45–54 age group at 24.2 percent.
- Household disposable income = household gross income − (Personal Income Tax + Resident Tax + Fixed Asset Tax + social security premiums).

*Distributional Effects of Tax Reforms in Japan — Working Paper No. WP/2022/150 (IMF staff appendix and references).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022150-print-pdf.pdf_