What needs to be done of personal income tax of Japan? A perspective for reform under deflation and aging population

The purpose of this paper is to study the problems and reforms of personal income tax in consideration of the current status of the economy, fiscal position and social security of Japan remaining under prolonged deflation since the collapse of asset bubbles. One prominent feature of the Japanese economy in deflation is that while companies have continued to secure profits, employee income has kept on dropping due to wage cuts and a shift in employment arrangements from regular employment to non - regular employment. As a result, a vicious circle of slumping domestic demand escalating deflation has arisen. In the meantime, the government has supported the Japanese economy through fiscal expansion. Fiscal expansion has shifted from public investment to social security expenditures, so the growth in social security expenditures has continued unchecked amid the ongoing aging of society. Under these circumstances, the generational gap in the tax and social security burdens has been expanding. This paper paid attention to the current situation where the social insurance payments burden has become heavier than the tax burden for younger people with low income. As a reform measure to correct this problem, the paper first called for integrating tax and social security premium burdens into a widely defined income tax burden and for introducing tax credits to lessen the social insurance premium burden that cannot be mitigated through income deduction. Second, the paper argues that in order to finance the tax credit, it is necessary to require people with high income to bear a heavier burden than now by cutting income tax deductions and expanding the tax base, instead of raising the top marginal tax rate, which is currently 55%, including national and local taxes. Third, the paper argues that it is necessary to reform the deductions for social - insurance premiums and public pension. Taking into consideration the feasibility of the reform, the paper argues that it is urgent to abolish the public pension deduction (for calculating income for taxation) for correcting the present inequality of burden among generations and reducing the tax burden on elderly low - income earners.