A drastic change in the nation’s tax system to encourage greater workforce participation by women could have been an effective prescription to addressing a labor shortage in the rapidly aging country.
But any revision to the spousal tax deduction system is likely to be minor in this year’s tax reform plan — due mainly to opposition from within the ruling parties — despite eagerness expressed by Prime Minister Shinzo Abe.
“We will encourage women to work without making adjustment,” Abe told a Sept. 9 meeting of the government’s tax commission. “We would like to create a (tax) system that is neutral to various ways of working.”
The spousal tax deduction system imposes a ¥1.03 million annual limit on spousal earnings for households to qualify for the tax break.
Though the system was introduced in 1961 to support housewives, it has been criticized for discouraging women from working long hours so they can remain eligible for the tax break.
Under the system, taxpayers can claim a special deduction of ¥380,000 from their taxable income if their spouse earns no more than ¥1.03 million a year.
The revision to the spousal tax deduction system was seen as a key policy objective of the prime minister to promote more women to join social and business activities after Abe set up a panel last month to reform the country’s working practices.
“The biggest challenge in the Japanese economy is a declining potential growth rate,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co., adding that what the country needs is a policy to fully utilize the existing labor force.
“The spousal tax deduction system should be scrapped in order to address this issue, but it is disappointing to have backed away from such a move,” Kodama said.
According to government data in 2012, employment income of married women between the ages of 30 and 60 years old averaged around ¥1 million, indicating that they are adjusting to labor demands.
The Japan Association of Corporate Executives, or Keizai Doyukai, has proposed the government scrap the spousal tax deduction. It argues that the ¥1 trillion in additional tax revenue that would be generated by ending the break could be used to assist in child rearing to address low birthrates.
“To revitalize the Japanese economy, we have to increase our labor force,” said Yoshio Sato, head of the business lobby’s Fiscal and Tax Reform Committee. “Since our country cannot actively accept immigrants, we have to utilize the potential workforce at home.”
Prior to full-fledged discussions, the tax commission chief of Abe’s ruling Liberal Democratic Party, Yoichi Miyazawa, indicated a willingness to bring forth “major revisions” to the system. “Review of the spousal deduction is one of the pillars,” he said on Aug. 30.
LDP policy chief Toshimitsu Motegi displayed a more positive stance, calling for the introduction of an income tax system that does not set a limit on the earnings of spouses and having the shift reflected in a reform plan for fiscal 2017 starting in April.
But Tetsuo Saito, tax commission chief of LDP coalition partner Komeito, expressed a cautious view.
“We need thorough discussions,” he said in a Sept. 23 interview. “It is absolutely unacceptable to have the issue decided hastily.”
The party was apparently worried about an increased burden on households with homemakers, who are key supporters for Komeito, with speculation looming that Abe could call a snap election as soon as January.
Some LDP lawmakers were also cautious as the new system would increase taxes on their supporters and go against the view by some that wives should stay home rather than work.
“We need more time to persuade our female supporters,” a senior Komeito lawmaker said.
On Thursday, Miyazawa expressed the view that switching the spousal tax deduction system for a new one would be difficult, citing “many challenging issues,” but reiterating his willingness to overhaul the system in the future.
For now, the 55-year-old spousal tax deduction system is likely to remain in place with the exception of a minor change. The limit on spousal earnings is expected to be lifted to around ¥1.5 million or higher, exceeding the ¥1.03 million level that obliges spouses to pay social security premiums.
“As Prime Minister Abe has a very strong government base, he needs to exercise his strong leadership to realize major reforms in structural reforms,” but there has been little progress recently, Meiji Yasuda Life Insurance’s Kodama said, questioning the Abe’s commitment to reform.
Kodama also said that the prevalence of elections in the country are depriving lawmakers of incentives to follow through on structural reforms, which need a long-term perspective.
“Even the Abe government cannot escape from such a spell,” Kodama said. “Most lawmakers are worried about whether they can win the next election and reluctant to move forward reforms from a long-term standpoint.”
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