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Vol. 68, No. 2, pp. 150-168 (2017)

“Effects of Deductions of Personal Income Tax on Income Inequality in Japan: A Microsimulation of Reform of Spousal Tax Deductions and Tax Credit”
Takero Doi (Faculty of Economics, Keio University)

We investigate effects of reform of spousal tax deductions, which were listed in the 2017 tax reform outline, and deductions for persons on income inequality in Japan by using a microsimulation. The Japan Household Panel Survey (JHPS) in 2014 is used in the analyses. We find that the reform of exemptions for spouses does not substantially correct income disparity. It implies that the spousal tax deductions after the reform still remain as deductions from income (tax allowances), which have weaker effects in correcting income disparity relative to deductions from tax. In addition, we analyze a microsimulation which changes deductions from income to tax credits. That is, the reform in which deductions from income are abolished and tax credits based on household composition are newly established on only deductions for persons. We obtain the result that the Gini coefficient of the equivalent household disposable income slightly decreases. In order to decrease the Gini coefficient more, even deductions from earnings (deduction for employment income and deduction for public pensions) need to be abolished and tax credits need to be newly established. Moreover, according to a microsimulation, a “discount on social insurance premiums (tentative name),” which provide for partial compensation of premiums by using revenue from the personal income tax, acts to correct income inequality.