The Democratic Party for the People (DPP) did well in the recent general election, increasing the number of seats it held in the lower house from 7 to 28 (11 constituent + 17 proportional). The party with the most number of seats, the Liberal Democratic Party (LDP), has said it will work with the DPP on the latter’s legislation, since one of the main reasons for the DPP’s success (6.17 million proportional votes, or 2.5 times the number it received in 2021) is its pledge to help low-income workers increase their take-home pay. Currently, workers who make up to ¥1.03 million a year don’t have to pay national income tax. The DPP’s plan would raise that ceiling to ¥1.78 million.

The problem for the LDP, which while short of a majority still runs the government at the moment, is that the finance ministry (FM) hates the DPP’s proposal, since it could mean an estimated loss of ¥7.6 trillion in tax revenue for both the central and local governments. In fact, this enmity was so pronounced that last week, after a weekly magazine revealed that DPP head Yuichiro Tamaki was involved in an extra-marital affair, a rumor circulated claiming that it was the FM that leaked such intelligence, though there seems to be absolutely no evidence to that effect. Nevertheless, a lot of people are voicing serious concerns about the tax threshold policy, saying that it not only would deprive the country of much needed tax revenue, but that the whole proposal is based on “an enduring economic myth,” in the Japan Times’ words. The problem, however, is that many aren’t completely clear about the math of the proposal. In the simplest terms, the DPP wants lower income workers to keep more of their pay, which they will thus spend more freely and help stimulate the economy—and, in turn, generate more tax revenue. Moreover, the received wisdom about the current tax ceiling is that the part-time workers who make up the vast majority of the people to whom the ceiling applies tend to limit their work hours in order to make sure their annual pay does not exceed the ceiling, thus causing problems for employers who require more labor, not to mention the workers themselves, since it restricts their ability to earn. Those who object to the proposal mainly have an issue with this latter belief, saying that very few workers actually limit their work hours for tax reasons, because even if they break through the ceiling the tax they have to pay is so minimal that it makes no real difference. 

Financial planner Hiroko Ishikura explains on her blog that the situation is more involved than the media has let on, and that, in fact, explaining the various dynamics at play is difficult, since disposable income is determined by a number of factors beyond one’s basic pay, including social security premiums and the worker’s status as a dependent. When you include all these other factors it’s not so clear if the proposal has much meaning as either a stimulus of or a drag on the economy. It’s true that the tax ceiling in question probably doesn’t affect most workers’ final decision as to how much they will work in a year, but there are other ceilings that might.

The ¥1.03 million ceiling is based on a simple calculation: the basic tax filing deduction of ¥480,000 plus the basic income calculation deduction of ¥550,000. Ishikura agrees that it’s almost impossible these days to make a living on ¥1.03 million a year, and, in fact, it would be a violation of the Constitution’s Article 25 if the government expected people to, since such a sum would not guarantee “basic needs.”

Matters become trickier when the worker is a dependent of another taxpayer, which describes a large number of people being targeted by the DPP proposal—essentially, university students and spouses of full-time company employees. The latter category is particularly contentious because a new tax exemption that was recently enacted raises the tax ceiling for these spouses, almost all of them women, to ¥1.5 million. Above this ceiling, the exemption gradually decreases until annual pay reaches ¥2.01 million, at which point the exemption no longer applies. 

However, the more important ceiling is that for social security premiums, meaning pension and health insurance. If one spouse is a full-time company employee eligible for company health insurance (shakai hoken) and pension (kosei nenkin) and the other is declared a dependent on the first spouse’s tax return, the second spouse doesn’t have to pay any premiums on their pay up to ¥1.3 million a year. Above ¥1.3 million, the spouse has to start making contributions to social security programs, and they can be costly: 15 percent of income would go to the basic national pension plan (kokumin nenkin). A less remarked upon ceiling for spouses is the spouse allowance that many companies offer to full-time employees. In most cases, the employee is not eligible for this allowance if their spouse makes more than ¥1.03 million a year, so this practice adds another disincentive for a spouse to work longer hours.

The calculation becomes even more complicated when the dependent spouse’s work situation is factored in. At present, if the dependent spouse’s employer has more than 50 workers (until October it was 100) and they work more than 20 hours a week, then the spouse has to start paying premiums after they reach ¥1.06 million a year. The DPP’s proposal would remove the ¥1.06 million cap but keep the more-than-20-hours-a-week stipulation. This rule applies to all part-time workers, so if the DPP policy goes into effect, such workers may get a tax break on their extra income, but they are going to have to pay premiums they didn’t pay before, and if they are dependents of their spouses, they may not want to, because, according to the so-called number 3 exemption, wives (it is always wives) are eligible for full health care and pension benefits while they are dependents of their husbands without having to pay separately into the system as long as their husbands are paying their fair share into the various plans (meaning he splits his contribution with his employer). But once the wife breaks the income ceiling for dependents, she has to pay into the basic kokumin nenkin pension system and will no longer be eligible for benefits from her husband’s plan; and typically basic pension benefits are smaller than kosei nenkin benefits. This system has been controversial for years, since it has been cited by certain parties as the means with which conservative elements in the government encourage wives to stay at home and not pursue careers, despite the fact that two-income households have become more or less the norm. The idea of a multi-member household with only one breadwinner has become less economically viable since the 1990s. 

But the DPP’s tax proposal seems to be geared more toward students and other low-income earners who aren’t necessarily dependents, and that’s where the two sides actually clash. The problem seems to be that even if the taxable income ceiling is raised to ¥1.78 million, the worker is going to start paying premiums well before that, so the more-disposable-income argument would lose some of its rationale. If the worker is a student and still a dependent of a breadwinner, and the breadwinner wants that student to remain a dependent, then the student cannot make over ¥1.06 million. The labor ministry has proposed subsidies for employers whose part-time workers have to start paying premiums. The employers would pass on these subsidies to these workers as allowances to make up the difference. The allowances would have a time limit, and in practice all workers start paying premiums after they turn 20. And on Nov. 9, the welfare ministry also said it is considering removing the condition for company size in terms of people employed, in which case the ¥1.06 million ceiling would effectively be removed.