Debates on Individual Income Tax and Potential Japanese Tax Reforms

This paper reviews the debates on individual income tax and identifies some important tax reforms for Japanese individual income taxation. The basic role of tax on labor income is to ensure fairness by maintaining progressivity of taxation and to incentivize people, particularly women and the elderly, to work. To this end, it will be appropriate to expand the tax base by eliminating some tax deductions while introducing purpose-specific tax credits to provide work incentives. Regarding tax on capital income, it will be necessary to determine whether a one-time tax on capital income should be levied at the corporate level or individual level. Therefore, it is essential to expand the scope of consideration to the entire tax system, including corporate income tax. Since it is difficult to impose source-based taxation on capital in an open economy, a pragmatic approach such as dual income tax (DIT) with a substantially reduced corporate income tax rate will be a likely option. Fortunately, in Japan, it seems that DIT would make the current tax system more efficient and fairer without leading to any serious problems.