NEWS

Social security reform (2025), tax reform (2024)

https://www.japantimes.co.jp/news/2023/09/24/japan/relief-measures-japan-part-timers/

– situation: if annual income surpasses 130 m.e., part-timers lose their status as dependents
> need to pay social insurance premiums / shakai hokenryou?
> KKH, KGH, KN, KYH?
– results: many part-timers to work shorter hours –> labor shortages.

NEWEST PLAN
– allow part-time workers to remain as dependents for up to 2 consecutive years even if their annual income temprarily > 130 me
+ addional: subsidy plan from the JP welfare ministry
> 50 me per worker
> prevent a decline in take-home pay
> occurs when someone earn annual income (AI) > 106 me

– gossip:
government plan: social security reform in 2025

https://mainichi.jp/english/articles/20230523/p2a/00m/0na/018000c

Fiscal 2024 tax reform
Fiscal 2025 social security reform

terminologies:
– child allowance
> plan to expand to age 18
– measures to address the declining birth rate
– review the deduction for dependents

– financial burden
– tax reform
(prev: social security reform)

current system:
– tax deduction 38 m.e. per child aged 16 to 18 (HS students)
– from primary earner

– 2010
– Democratic Party
– establish: child allowance system
(CRA: child-rearing allowances)
> covering children up to JHS age
> abolished the deduction for dependents up to the age of 15
> shifting from ITD (income tax deduction) to allowance

– strong view:
> ITD is inevitable, along with the extension of the allowance
> expand CRA to HS students (16-18 yo)
> while they are also subject to the DFD* in the tax system
* DFD: deduction for dependents

– the revision of the deduction for dependents
> may increase the financial burden on households with high incomes.

https://www.tokyofoundation.org/research/detail.php?id=946

Tax & Social-Insurance System

Setelah diam-diam lieur dengan Nenmatsu Chousei (NC), akhirnya saya memutuskan untuk melototin berbagai bacaan yang berkaitan 😀

BAGUS BANGET INI

> discouraging fuller workforce participation by married women
– in the wake of the COVID-19 pandemic
– systemic flaws are threatening Japan’s economic recovery
– the tourism industry struggle to secure the labor they need to meet booming demand
– the need for more fundamental reform

Income Thresholds (6) and Their Impact
– 6 key income thresholds
> at which new tax and social-insurance burdens kick in,
> potentially discouraging secondary earners from working and earning more.

Income Thresholds Linked to Women’s Workforce Participation
1. ¥1.03 million: the cutoff for the old spousal deduction (or exemption)
> that tax break was replaced with the special spousal deduction
> the threshold for the maximum deduction was raised to ¥1.5 million in 2018.

2. Part-time workers must be enrolled in employees’ insurance if
(1) they work 20 or more contracted hours per week for a given employer,
(2) their contracted monthly pay is ¥88,000 or higher,
(3) they have been employed by the business for at least two months, and
(4) they work for a business with more than 100 employees.

Beginning in October 2024, the requirement will extend to all businesses with more than 50 employees.

?? adjusted income
– income vs earning
3. The deduction is reduced for primary earners with an adjusted income of more than ¥9 million but no more than ¥10 million (annual earnings over ¥10.95 million but less than ¥11.95 million) and eliminated for those whose adjusted income exceeds ¥10 million.

100 m.e.
103 m.e.
> the minimum taxable income for JZ & SZ
JZ = LIT: local inhabitant tax, IHT
SZ = NIT: national income tax, ICT

100 me: minimum taxable income for JZ?
103 me: minimum taxable income for SZ?

NIT: 103 m.e. = 48 me + 55 me
48 me: basic deduction: to guarantee basic living standards
55 me: employment income deduction: intented to cover the job-related expenses of employed persons, including those working part time

—
The threshold for the maximum spousal deduction was raised from ¥1.03 million to ¥1.5 million in 2018 with a view to encouraging women’s active participation in the labor force.
—

Beyond this thresholds:
each additional 1 me
= 0.1 me in JZ + 0.05 in SZ

– after-tax income
> continues to grow

1 me threshold as cutoff for certain welfare benefit
– disincentivizing work

1.06 me
1.3 me
> social-insurance premiums must be paid

EPI: Employees Pension Insurance
EPI system
for employee who works > 20 hours/week
monthly wages > 8.8 me
i.e., annually > 1.06 me

smaller business
annual income threshold: 1.3 me

THRESHOLD
1.06 me: based on contracted wages (excluding overtime pay, benefit allowances)

1.3 me: based on gross income from all sources (KIHON KYUURYOU?), including overtime, commuting, other allowances, dividends, real estate income, etc

For a married woman
– working part time to supplement her husband’s income,
– crossing the threshold can be costly, at least in the short run.

As long as she makes less than the threshold,
– she is classified as a dependent spouse, or
– Category III insured person.
– she is covered by the Basic Pension of the National Pension system and her husband’s health insurance plan, both at no cost

Beyond the threshold,
– she shifts to Category II and
– must contribute
> half of the 18.3% EPI contribution and
> half of the health insurance premium,
> roughly 10% (the rate varies by plan).
The employer pays the other half.

SUBSTANTIALLY LESS
With approximately 14% of her earnings going to social-insurance premiums,
she now takes home substantially less than she did when her income was just below the cap.

Indeed, according to our calculations,
her annual net income drops by about ¥160,000 (16 me!!!)

To recover the lost income, the woman’s earnings would need to increase an additional ¥270,000, to ¥1.33 million.

Because of this,
– many women limit their hours in order to keep their annual employment income under the cap and
– remain dependent spouses.
(According to the government, there are some 4.73 million Category III insured persons who work part time.)

Thus far, the government’s efforts to rectify the situation have focused on
> expanding EPI coverage
– to more part-time employees.
> Initially:
– only companies with more than 500 employees were required to enroll part-time employees (working at least 20 scheduled hours a week) who earned ¥1.06 million or more.

the policy was extended
– In 2022: to businesses with more than 100 employees
– in October 2024: it will apply to those employing more than 50

THE 130 ME BARRIER
The thinking is that, once the same rules apply to all companies regardless of size, the ¥1.3 million barrier will disappear. This approach is fundamentally sound.

A Problematic Subsidy
That said, the ¥1.06 million and ¥1.3 million income thresholds remain controversial
– as barriers to women’s
– full participation in the labor force.

At a March 17
PM Fumio Kishida announced plans to address this issue through “support for measures”
– that would prevent a drop in take-home pay

– focusing on the quick fix
> to partially compensate married part-time employees for any loss in take-home pay triggered by an increase in hours or wages
– until the women’s additional earnings covered
> the added burden of social-insurance premiums

– full-time homemakers
– but earn under the threshold
Under the current system, women who earn under the threshold (including full-time homemakers) receive
> free social-insurance benefits as Category III insured persons, at the taxpayers’ expense.

– pension premium
– pension benefit

UNFAIRNESS
PAYING SOCIAL-INSURANCE PREMIUM
Now the government is also offering to foot the social-insurance bill for those who earn more. This seems particularly unfair to Category I insured persons—including sole proprietors, independent contractors, and short-term contract workers—who must pay their own social-insurance premiums. Another basic question is whether it is appropriate for the government to contribute to employees’ pensions, given that they will receive the pension benefits after they retire.

CONSIDERABLE ADVANTAGE:
ENROLLING INDIVIDUALLY IN JP SI SCHEMES
SI: SOCIAL INSURANCE
Overcoming the “Barrier” Mindset
It is important for people to realize that there are considerable advantages to crossing the income “barrier” and enrolling individually in Japan’s social-insurance schemes.

GREATER POST-RETIREMENT SECURITY
BP benefit
BP: basic pension

BP + compensation-tied benefit
> increases the longer one works
> one can look forward to greater post-retirement security
> Once one’s annual income reaches about ¥1.33 million

2-tiered pension system
Under Japan’s two-tiered pension system,
Category III insured persons are eligible only for the flat Basic Pension benefit.
Those enrolled in EPI receive the Basic Pension plus a compensation-tied benefit, which increases the longer one works. Once one’s annual income reaches about ¥1.33 million, the negative impact on take-home pay disappears, and one can look forward to greater post-retirement security.

if earning 105 me annually
–> 110 me
–> by their early eighties their accumulated EPI benefits would more than cover the previous loss of disposable income

smart option for women, given their long life expectancy

It has been estimated, for example, that if someone who had been earning ¥1.05 million annually began making ¥1.10 million and enrolled in EPI, by their early eighties their accumulated EPI benefits would more than cover the previous loss of disposable income. This is generally considered the smart option for women, given their long life expectancy.

EHI : Employees’ health insurance
advantages over NHI (national health insurance)
> injury
> sickness allowance
> maternity allowance
> expanded disability pension benefits

In addition, those who reach the income threshold can switch to employees’ health insurance, which offers a number of advantages over National Health Insurance, including an injury and sickness allowance, a maternity allowance, and expanded disability pension benefits.

– immediate reward
– the challenge of calculating the costs and benefits over a lifetime
!! in the real world there is a strong tendency to focus on immediate rewards (take-home pay)

>> effectively communicating the merits of Employees’ Pension Insurance

THE MERITS OF EPI: EMPLOYEES’ PENSION INSURANCE

All of that said, in the real world there is a strong tendency to focus on immediate rewards (take-home pay), especially given the challenge of calculating the costs and benefits over a lifetime. As a result, spouses working part time to supplement household income do tend to treat the ¥1.06 million and ¥1.3 million thresholds as barriers and limit their working hours accordingly. The government could reduce the mental barriers to working beyond these thresholds by more effectively communicating the merits of Employees’ Pension Insurance.

other thresholds
150 me
201 me

JP tax system
> no provision for JITR: joint income tax returns

– primary earner (PE): take special spousal deduction
– PE w/ spouse make < 150 me
– can deduct 38 me from their taxable income
– above that, the deduction is reduced incrementally, disappearing entirely for those with spouses earning 201 me or more
– High-income primary earners are not eligible for the deduction.

ATI: after tax income
= THP? take home pay?

Passing these thresholds:
lowing the increase in a household’s after-tax income
no “tax cliff” and thus little disincentive to work
because the deduction is phased out gradually

— allowance of dependent children ??

the ¥1.03 million income-tax threshold as a barrier
– private companies have traditionally used this figure in their calculations of spouse and family allowances
– However, this practice is being abandoned in favor of allowances linked to the number of dependent children

the ¥1 million threshold for the local inhabitant taxes is more problematic than either the ¥1.03 million or the ¥1.06 million threshold

The inhabitant tax obligations begin when an individual’s employment income reaches ¥1 million. With deductions figured in, the threshold is ¥1.35 million for married couples and ¥2.04 million for earners in households with dependent spouses or other relatives.

welfare benefits linked to this threshold
– to soften the impact of inflation, the government is offering households below the threshold a uniform cash benefit of ¥30,000 along with a ¥50,000-per-child subsidy. This means that a family with two children can receive ¥130,000 as long as it stays just under the ¥1 million threshold

Households that stay under the threshold are also eligible for need-based government scholarships for high school and college students. Together, these programs could create a potent incentive for staying under the inhabitant-tax threshold. Since inhabitant taxes are based on the previous year’s income, they can easily influence next year’s employment decisions.

CONTRIBUTE TO THE CYCLE OF POVERTY

by no means unique to Japan. In other industrial countries, measures have been adopted to eliminate incentives of this sort on the understanding that they contribute to the cycle of poverty

refundable tax credits
– Britain, the Netherlands, South Korea, Sweden, and the United States
!!
Treating social-insurance premiums and taxes as a single burden
> assist low-income households while preserving their incentive to work by preventing any drop in disposable income resulting from an increase in earnings

JP must build the necessary tax infrastructure
Digital safety net:
taking into account the tax and social-insurance burden

OTHER LINKS
(terlihat menarik tapi belum sempat dibaca)
https://www.rieti.go.jp/en/papers/contribution/kondo-ayako/01.html
https://japannews.yomiuri.co.jp/society/general-news/20230203-88721/
https://www.jetro.go.jp/en/invest/setting_up/section3/page7.html
https://www.expat.hsbc.com/expat-explorer/expat-guides/japan/tax-in-japan/
https://www.nichizeiren.or.jp/eng/pdf/GuidetoJapaneseTaxes2018.pdf