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Spousal tax deduction system up for review

The tax research commission of the ruling Liberal Democratic Party (LDP) is set to re-evaluate a tax deduction for spouses that is currently in effect for the purpose of alleviating the burden of taxes on households with full-time homemakers. The objective is to nudge women's entry into the workforce -- a pillar of the administration of Prime Minister Shinzo Abe's "Plan for the Dynamic Engagement of All Citizens" and "Working-style Reform" -- as low birthrates and an aging national population are resulting in a shrinking workforce.

There are bound to be objections from households whose taxes go up as a result of reforms, however, and many are of the opinion that women's entry into the workforce will not progress unless systems and policies in addition to those regarding taxes are improved.

LDP Secretary-General Toshihiro Nikai expressed his positive outlook on the re-evaluation of spousal tax deductions at an Aug. 30 press conference, saying, "It is an indication that we are poised to support women's entry into the workforce and households in which both spouses work through tax reform," he said.

The spousal tax deduction system was implemented in 1961, to support "husband as 'salaryman' (company employee) and wife as full-time homemaker" households that were common at the time, during a period of rapid economic growth in Japan. The deduction amount gradually grew to 380,000 yen. Families in Japan, including women's working styles, have changed dramatically since then, however. In 1980, there were 11.14 million households with full-time homemakers. That figure went down to 6.87 million by 2015. Meanwhile, the number of households in which both spouses work surpassed the number of households with full-time homemakers in 1997, and reached 11.14 million by 2015.

Based on the fact that the tax system no longer complemented families' needs, debate on re-evaluating the spousal tax deduction system arose in the 2000s. However, concerns among the government and ruling party that eliminating the spousal deduction system would draw objections from households with full-time homemakers have led to reform being put off. The issue had been shelved even after Prime Minister Abe issued instructions to review the system in March 2014.

There are graded income-based barriers to women's entry into the workforce. There is the 1.03 million-yen barrier, which is the maximum amount a spouse can earn in a year if her husband is to receive a spousal deduction on his taxes. It is also the point at which many employers reduce the amount of spousal allowances given to their employees. The 1.3 million-yen barrier, meanwhile, is at the point in which the spouse is obligated to pay her own health insurance and pension premiums. Once a spouse earns 1.41 million yen, her husband is no longer eligible for the special spousal deduction, the system that reduces his tax burden even after his wife's income exceeds 1.03 million yen.

The momentum behind the re-evaluation of spousal deductions is in part due to the establishment of "working-style reform" as a pillar of Abe's economic policy mix, "Abenomics." In the Cabinet reshuffle carried out in early August, Abe set up a new Cabinet post overseeing the issue in order to design an environment that is conducive to women entering and staying in the workforce. Abe has also put into effect dramatic monetary easing measures, but the economy remains stagnant. And one of the reasons that have been raised for this continued economic slump is the shortage of manpower that has resulted from Japan's population decline.

When there are few workers, the number of public works projects that can be carried out and production by private corporations become limited. The administration's aim is to encourage women to work and contribute to Japan's economic growth. The Finance Ministry is enthusiastic about the plan because there would be no limit on a husband's income for a household to become eligible for a spousal deduction, meaning that the greater one's income, the more one has to gain.

However, specific tax reforms have yet to be drafted. The focus now is on how the government will deal with households whose tax payments will be higher after reforms are implemented.

If spousal tax deductions are eliminated, a household in which the husband's annual income is 6 million yen would face a tax increase of approximately 70,000 yen, according to one estimate. In place of the current spousal tax deduction system, the implementation of a new type of "spousal deduction" in which each married couple would be eligible for a certain level of tax deduction regardless of income or working style will be up for debate. It is expected that more people will be eligible for such a deduction than the current spousal deduction system. But in order to prevent too big of a reduction in tax revenue, there is a possibility that the government will put a maximum eligibility limit on the husband's income, or decrease the amount that is deducted -- which means that even with a new spousal deduction system, many households will see their taxes go up.

To alleviate such burdens, it appears that implementation of a grace period that would allow people to ease into the new spousal deduction system will be discussed. Drawing the line for a maximum eligibility income limit will also be a challenge.

Because it is possible that a reform in the system will undermine Japan's "traditional" image of the family, in which the husband works outside while the wife takes care of the home, many in the LDP -- whose supporters are largely conservative -- are calling for caution in carrying out reforms. The LDP's junior coalition partner, Komeito, meanwhile, has many low-income supporters. "This is an issue that ties in directly with household incomes," one senior Komeito official says. "It'll be difficult to find a good compromise."

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