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Editorial: Income redistribution should be heart of ruling bloc's tax system reforms

The ruling coalition has approved an outline of tax system reforms for fiscal 2018 with special emphasis on a review of tax deductions, a system aimed at reducing the income tax burden on taxpayers.

However, the government was supposed to consider how the entire tax system should be reformed ahead of the consumption tax hike from 8 to 10 percent scheduled for October 2019.

The consumption tax is increasingly important as a stable financial resource for snowballing social security spending. However, the indirect tax levied on virtually all goods and services is regressive, placing a heavier burden on lower-income earners. And the income gap is widening as the number of non-regular workers increases.

Reinforcing income redistribution to ease the impact of the regressive consumption tax and narrow the income gap is essential. Income tax should play an important role, but the tax system reform outline falls well short of fulfilling this task.

The basic deduction to which all taxpayers are eligible will be expanded, while tax deductions for mainly high-earning company employees will be reduced. As a result, lower-income freelancers will receive tax cuts while company employees with an annual income of 8.5 million yen or more face tax increases.

The governing bloc comprising the Liberal Democratic Party and Komeito claims that the measure is aimed at promoting income redistribution. However, while retaining the system of deductions from taxable income, which is favorable to high-income earners, the ruling coalition focused excessively on the annual income threshold for tax increases.

About 2.3 million people across the country will face tax increases. If the government is to place an additional tax burden on taxpayers, it should show a vision for a tax system that will strengthen the redistribution of income to win public understanding.

The tax system reform for fiscal 2018 has some contradictions. Under the proposed reform, a system will be introduced to scale down basic deductions for high-income earners, but only those earning at least 24 million yen annually will be subject to the system. Self-employed people earning 20 million yen a year will see their taxes reduced, running counter to the policy of redistributing income.

Deductions from the amount of the income tax, in which the same tax break is applied regardless of one's income, are beneficial to lower-income earners and more effective in promoting income redistribution than deductions from total income. The introduction of such a system would require drastic reform, but is worth considering.

It is necessary to strengthen taxation on income such as stock dividends and proceeds from share sales. The highest tax rate on salaries is 55 percent, but the maximum tax rate on capital gains and dividends is only 20 percent. The wealthier strata of society, who make more money than highly-paid company employees who are set to see their tax burden increased, have more such income from financial products.

The tax system reform outline calls for the introduction of a new "exit" tax for those departing Japan, and a forest environment tax to be added to residential taxes to cover the costs of preserving forests. Just like in income tax reform, the coalition apparently intends to require those who are unlikely to voice opposition to shoulder an extra financial burden without sufficient debate on what kind of society and system it is aiming for.

The administration is aiming to bring in more money from those it can easily ask to shoulder a heavier burden, and for that the tax reform outline deserves criticism. The governing coalition should not draw a curtain on income tax reform, but embark on a fundamental overhaul of the tax system.\

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