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Japan's mortgage tax relief system 'unfair,' leaves low-income earners ineligible

Members of the housing industry gather to call for the mortgage tax relief system's scale to be maintained, in front of a conference room where a small committee of the Liberal Democratic Party (LDP)'s Research Commission on the Tax System was meeting at LDP headquarters in Tokyo's Chiyoda Ward in November 2021.

TOKYO -- For people in Japan seeking home loans, the mortgage tax relief system has become indispensable. While the scale of tax reductions in the fiscal 2022 outline of tax revisions is set to be effectively maintained, it seems like the level of reductions has been made a constant. But many are voicing doubts about the policy's effectiveness and fairness.

    "As a housing policy, is it appropriate to focus on new homes and promote home ownership? The issue needs deliberating, including on topics like this," a senior Finance Ministry official in charge of tax system design said on Nov. 30, 2021.

    Then, debate over tax revisions was in full swing, and a meeting of a small committee under the ruling Liberal Democratic Party (LDP)'s Research Commission on the Tax System was being held at LDP headquarters. The meeting's atmosphere was highly irregular; housing industry figures calling for the scale of tax relief to be maintained and expanded had flocked to party headquarters and were packed all the way outside the conference room.

    All of this has happened while the tax relief system has become increasingly anachronistic and unable to deal with societal changes including depopulation and changes in family composition.

    Buying a home is often called the biggest purchase in one's life. Japan's first tax break system to support homebuying was created in 1972, when members of the baby boomer generation were marrying and starting their own families. The tax relief system then involved deducting a portion of funds needed to buy a home from one's income tax contributions. Annual mortgage payments and outstanding mortgage payments at the year's end became subject to deduction from income tax contributions in 1978 and 1986, respectively.

    When consumption tax rates were raised from 5% to 8% in 2014, the outstanding mortgage payments cap went from 20 million yen (approx. $174,000) to 40 million yen (approx. $348,000).

    Under the current system, 1% of year-end outstanding mortgage payments are deducted from income tax and resident tax over a decade. From fiscal 2022 onward, the deduction rate will be lowered to 0.7%, but the deduction term of a newly built home will as a general rule be prolonged to 13 years.

    According to Finance Ministry calculations, changes in the system, such as longer deduction terms, will cost the government an average of 2 billion yen (approx. $17.4 million) more every year. The ministry seems to be questioning whether it needs to continue large-scale tax-reduction measures to support home buyers amid Japan's financial deterioration.

    Economic strains have become increasingly apparent in recent years as the country fails to deal with the declining birthrate and rising proportion of elderly people.

    The main target of mortgage tax breaks -- families comprising a couple and their children -- made up 40% of tax relief beneficiaries in 1985. By 2020, this had dropped to some 25%. The main cohort of home buyers, primarily younger generations, is also dwindling.

    But at the same time, housing stock is increasing with the mortgage tax relief system's support. According to the Ministry of Internal Affairs and Communications' Housing and Land Survey, in 1968, the Japan's number of homes surpassed its number of households to live in them. In 2018, there were about 54 million households and about 62.4 million homes.

    In other words, vacant home quantities are increasing significantly. Under the current situation of rising rates of unoccupied homes, some are asking whether further mortgage tax breaks and homebuilding promotion is needed.

    Kazumasa Oguro, a professor of public economics at Hosei University's Faculty of Economics, discussed the system from the viewpoint of a sense of unfairness. "The mortgage tax relief system is a mechanism in which the tax burden of mid- to high-income people able to buy homes is covered by the tax contributions of others including low-income earners. Can this be called fair?" he said.

    The mortgage tax relief system's benefits are limited to mid- to high-income earners who can take out mortgages to buy homes. The fact of the matter is that many low earners are completely left out.

    In other countries in similar situations, moves to abolish mortgage tax break systems are spreading. According to Oguro, the U.K., Germany and France have stopped employing the system, and there is a growing trend toward more balanced support systems using the funds to assist individuals below a certain income bracket to purchase homes.

    Politics and industry groups stand in the way of making reform in Japan easy. In the fiscal 2022 tax revision debate, senior officials at the LDP's tax research commission and the Ministry of Finance were enthusiastic about shrinking the system. But objections erupted when debate gathered momentum in the ruling parties, leaving the commission and the ministry with no choice but to change course.

    Objections partly came out of the LDP's ulterior motive to gain support from younger generations. The House of Councillors election is this summer. One mid-ranking LDP lawmaker said, "Housing industry groups have extremely strong political influence."

    Will this system be reimagined into one that truly foresees the future and is for the people? Politicians' decision-making capacities are being put to the test.

    (Japanese original by Yuki Machino, Business News Department)

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