Abstract
In terms of the “relative poverty rate” measured by disposable income, Japan ranks as the third most unequal country among OECD member advanced countries, following only the United States and Israel, which has a large Palestinian refugee population.
The cause of Japan's high poverty rate does not lie in pre-tax market income inequality. Rather, it stems from the heavy tax and social insurance burdens imposed on low-income earners and the limited benefits they receive in return.
This paper demonstrates these issues and clarifies that the most effective policies to substantially increase the disposable income of low-income individuals are the introduction of an earned income tax credit, and the tax financing of the basic pension and health insurance.
On the other hand, various proposals have been made to raise income tax deductions to boost disposable income. However, such measures do not benefit individuals who fall below the minimum taxable income level. Consequently, they do not alleviate the burden of the disproportionately high social insurance contributions these individuals must pay. Besides, these measures provide substantial tax cuts for middle- and high-income earners, wasting the fiscal resources that could have been used to reduce these burdens.
Especially for low-income earners, increasing deductions is an inefficient approach, as it fails to address the real cause of poverty in Japan: the disproportionately high social insurance contributions borne by those at the lower end of the income distribution.
Under the current Japanese tax system, full-time housewives earning more than 1.3-million yen are required to bear their own social insurance premiums, which discourages them from working beyond this threshold. This is known as the “1.3-million-yen barrier.” To address this issue, political parties have proposed providing fiscal subsidies to reduce the burden of social insurance premiums. However, such subsidies would divert funds needed for poverty alleviation such as earned income tax credits or the tax-financing of the social security system. This paper proposes a method to eliminate the 1.3-million-yen barrier without government fiscal subsidies, thereby securing funding for poverty alleviation.
