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Factor decomposition of changes in the tax base for income tax

Author

Listed:
  • Taro Ohno

    (Associate Professor, Research Center for Social Systems, Shinshu University)

  • Junpei Sakamaki

    (Researcher, Policy Research Institute, Ministry of Finance)

  • Daizo Kojima

    (Associate Professor, Graduate School of Agricultural and Life Sciences, The University of Tokyo)

Abstract

Following generous tax deductions, Japan's income tax base is facing shrinkage. However, this trend has evolved not only due to changes to the system, but also due to changes to the income distribution and population composition. In this study we use household micro data from the National Survey of Family Income and Expenditure (NSFIE, 1994-2014) to explicate the state of deductions and trends in household distribution over a 20-year period while considering each factor fs contribution to changes in the tax base, through their decomposition. Using a micro-simulation analysis, we also assess the effects of recent changes to the tax system on the tax base. Based on a long-term perspective, while the tax base has been eroded mainly due to the effects of falling incomes and an aging population, the contribution of system changes in response to such pressures has been limited. The inclusion of both the expansion and contraction periods in the deduction system also has an effect. Based on a short-term perspective, changes to the system have had a certain impact because, particularly in the 2000s, the tax base was expanded by reducing deductions. However, this effect has eventually been offset by the changes in income distribution and population composition. Following the ongoing effects of change such as falling incomes and population aging, it is necessary to fundamentally reform the income tax system so that it can have a greater effect, including restoring its fiscal funding and income redistribution functions, as well as the ideal form of the tax base.

Suggested Citation

  • Taro Ohno & Junpei Sakamaki & Daizo Kojima, 2020. "Factor decomposition of changes in the tax base for income tax," Discussion papers ron331, Policy Research Institute, Ministry of Finance Japan.
    • Handle: RePEc:mof:wpaper:ron331
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    References listed on IDEAS

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    Cited by:

    1. Taro Ohno & Junpei Sakamaki & Author-Name:Daizo Kojima, 2021. "Effects of Deductions on the Tax Burden Reduction and the Redistribution of the Income and Resident Taxes," Discussion papers ron338, Policy Research Institute, Ministry of Finance Japan.
    2. Ohno, Taro & Sakamaki, Junpei & Kojima, Daizo & Imahori, Tomotsugu, 2021. "Effects of deductions on the tax burden reduction and the redistribution of the income and resident taxes," Japan and the World Economy, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    Income tax; tax deduction; tax base; National Survey of Family Income and Expenditure;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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