Let’s think about the added benefits instead of added burdens caused by a tax increase

November 6, 2019

Let’s think about the added benefits instead of added burdens caused by a tax increase

Shintaro Kurachi
Senior Assistant Professor, School of Political Science and Economics,
Meiji University
 

Japan’s consumption tax has been raised to 10 percent. Until it was raised, debate on the introduction of a reduced tax rate and reward points system was vigorous. However, a reduced tax rate is a very inefficient system from the perspective of public finance. Why was this vigorously debated? Because the essential point of the tax was not thoroughly discussed, and its meaning was lost.

Democracy determines the tax system

As we all know, the national tax system and how our taxes are spent are debated and determined by the Diet. However, we are inclined to think that tax is collected on a mandatory basis and spent on things that have nothing to do with us.

This is because fiscal democracy may not be functioning properly in Japan.

There is a saying, “Cut your coat according to your cloth.” It means one must plan one’s expenditure according to one’s monthly income.

In contrast, on the fiscal front, the idea is the complete opposite. The idea is that when the need arises, taxpayer’s money should be collected.

To do so, it will therefore be important to carefully discuss how tax money should be redistributed to meet various needs, and then how a tax should be imposed; otherwise, you will not be able to win the understanding of the taxpayers.

At the same time, it is important for us, taxpayers, to become interested in and give our attention to debates in the Diet or in local council.

However, taxpayers in Japan are not greatly concerned with politics as can be seen in the previous House of Councillors election, where the voter turnout did not reach 50 percent. In fact, many people think it is taboo to talk about politics in daily life. But if we do not raise our awareness of politics, we will not likely understand why we are inclined to think taxes are spent on things that have nothing to do with us.

Needless to say, there are people from different walks of life in our society. However, the people we interact with in daily life is unsurprisingly limited, and therefore we too often forget about social diversity. There are regular employees with a steady income, non-regular employees with a low or unstable income, and jobless people. There are families raising children, as well as single mothers and aged people.

These people have different needs, and so the form of redistribution differs depending on those needs. We cannot just provide benefits across the board – it is not that simple. If the various layers of need can be incorporated into the redistribution system, disparities will be narrowed within society and everyone can then live with peace of mind.

You may not be struggling now, but you may have a compelling fiscal need in the future. You may be healthy and make a steady income from your full-time work now, but you may have family and raise children, get older, lose your job, or fall ill.

Even so, if you understand that society will provide you with the necessary support in your time of need, you will no longer think taxes are spent on things that have nothing to do with you.

However, in reality, the divisions among diverse people are widening in society. I think this is because discussion on effective redistribution is insufficient. In other words, fiscal democracy, the idea of making fiscal decisions on the basis of democracy, has not fully penetrated society.

Certainly, what I have been talking about may sound too basic. However, when we just focus on situations in Japan, we are often blind to this fact. For example, when comparing Japan with other countries, we realize that some things which seem totally natural in Japan may be very unnatural in other countries.
Taxation and social security system reforms in Denmark

As people living in Japan, we are inclined to think that Nordic countries are ideal because all taxpayers are entirely convinced of their systems in spite of the heavy burden they have to bear to ensure comprehensive social welfare programs.

Is this really true? This simple question has been the impetus of my engagement in research on taxation and social security systems as well as local public finance in Denmark.

In Denmark after World War II, at the same time that the burden on taxpayers was increasing, inflation was also accelerating. As a result, as the tax burden of the low-to-middle-income class kept increasing, public distrust in the taxation system grew. In addition, because of defects in the tax deduction system, high-income earners hardly paid taxes, and, conversely, it was often the case that people in need of personal social services were given the bureaucratic runaround. There was great frustration among the general populace.

In a public opinion poll conducted in 1973, over 90 percent of those surveyed agreed to the statement, “lawmakers are squandering taxpayers’ money.” Basically, most taxpayers in Denmark were not convinced of the efficiency of the taxation system at that time.

Around that time, a lawyer founded the Progress Party to protest radically against high taxation, and in the 1973 general election the party suddenly became the second largest party in Denmark. This was their so-called “tax revolt.”

The party put up radical policies, including the abolition of income tax; the replacement of all social workers with civilians; deprivation of the right to vote for people over 60; defense spending limited only to the bill for phone calls made to foreign countries. However, these polices were never realized, and in the end, the momentum of the party did not last into the 1980’s.

Nonetheless, with this tax revolt as a trigger, the taxation and social security systems in Denmark were reformed.

For example, the complex income tax scheme and the tax deduction system became much simpler. Although progressivity was not necessarily high, it became difficult for high-income earners to evade taxes, and therefore, the taxation system became more equalized.

On the other hand, the income security scheme was significantly refined. For instance, a guaranteed minimum pension is secured for senior citizens through taxes, a child allowance is provided for families raising children, and a housing allowance is provided for the needy, including young people.

These systems are intricately combined to secure income, and thus diverse people can become eligible for the kind of security that is best suited to them.

I think this idea is different from the basic income which is often recognized as the income security system in Nordic countries, that is, a fixed amount of money issued equally to people. In recent years, a basic income experiment took place in Finland. However, this experiment cannot be considered a substitute for the combined income security system in Denmark.

Another characteristic of the Danish taxation system is that the tax base is very broad. The tax base means the range of taxable income. When deductions are large, the tax base becomes small. The tax base of benefits is quite small in Japan by international standards. In Denmark, pensioners and even welfare recipients pay income tax. As a matter of fact, those people receive enough benefits to be able to pay taxes.

You may wonder why the process is so cumbersome. At the root of the idea of taxation is the principle that everyone pays taxes and everyone receives benefits.

As a result of these reforms, in the 2000s, less than half of those surveyed agreed to the statement, “lawmakers are squandering taxpayers’ money.”

Japan should learn from Danish fiscal democracy

There are many things Japan can learn from Denmark. However, the social circumstances are different between Japan and Denmark. Just adopting the systems employed in Denmark like a patchwork quilt does not mean they will work in Japanese society.

As one of its characteristics, Denmark has been said to be remarkably homogeneous. Income disparity before redistribution as well as economic disparities between regions are very small by international standards.

These factors have made it easy for Denmark to design taxation and social security systems in which every citizen agrees to pay taxes and receive benefits.

However, although it remains at a low level, income disparity has been gradually widening. Since the 2000s, a far-right party has gained power in Denmark and has been implementing aggressive anti-immigrant policies. For example, they essentially slashed welfare payments for immigrants in half and confiscated the assets of refugees.

In fact, the predecessor of this far-right Danish People’s Party was the Progress Party mentioned earlier. Denmark did overcome the anti-tax movement. But as society has become more diversified, it has been attempting to limit immigration in order to maintain its welfare system.

If Japan adopts the Danish taxation and social security systems, will we be able to gain consensus from taxpayers and will social integration advance? The issue is more complex than that.

Furthermore, there is not so much difference among revenue sources of each local government in Denmark compared to Japan. So, there is little need to rectify disparities within local governments with subsidies from the national government. This situation allows local governments to reduce their debts as much as possible and decentralize fiscal management. By contrast, Japan is faced with problems such as the massive government debt crisis and the rectification of regional gaps due to the overconcentration of power in Tokyo. From these examples, it can be seen that situations vary greatly between Japan and Denmark.

Nevertheless, when examining the systems employed in Denmark in a more concrete manner, one realizes how elaborately and reasonably those systems have been designed. And Japan has much to learn from this.

One example is Denmark’s income security system. In Japan, where income disparity is wide, it is effective to establish a diversified benefit system by combining various schemes best suited to each individual’s situation.

In Denmark, housing allowances change in tandem with rent or income levels. At the same time, the amount of allowance is controlled to maintain the appropriate quality and rent of housing. This way, the allowance will never be excessive. We should take note of how the Danish income security system is designed.

Value added tax (VAT) in Denmark, which is equivalent to Japanese consumption tax, has another interesting attribute in terms of the system design. Denmark applies a VAT rate of 25 percent and no reduced tax rates except for the purchase of newspapers. This is rare even in European countries.

Before the consumption tax rate was raised to 10 percent, there was quite a bit of debate over the reduced tax rate in Japan. But the reduced tax rate is incredibly inefficient.

We all buy daily necessities even if the tax rate is high. But if the reduced tax rate was applied, tax revenues would drop significantly, and the high-income earners would also benefit from the reduced tax rate.

Certainly, there is the tendency that the lower a person’s income is, the heavier the burden is under consumption taxes. This is called the regressivity of consumption tax. However, redistribution will be more effective if the tax revenues that are increased because of no reductions in tax rates can be used for low-income earners.

In Denmark as well, there were once movements calling for reduced tax rates during the time of the anti-tax movement. But Denmark has maintained the VAT rate with the concept of rectifying disparities with income tax and benefits instead of adopting reduced tax rates.

Japanese taxpayers are inclined to think they feel ripped off when they pay taxes. But the taxpayer’s idea of tax in Denmark and other Nordic countries is different. For them, saving money or paying taxes is just a matter of where they put their money. Since this is the case, there is no need for them to save a large amount of money for retirement. Rather, they think it is safer and more efficient to entrust their money to national or local governments.

Such an idea gradually took root in Denmark when the 1970s saw a strong tax revolt. After that, national and local governments promoted increasing the income tax burden instead of decreasing tax rates and alleviating the frustrations of taxpayers.

The heavy income tax burden was accepted in Denmark because tax reforms gave evidence of benefits for all people in an equitable manner. And most importantly, a broad range of citizens, both young and old, participated in the political discussion at the grassroots level in order to deepen their understanding of taxation and social security systems.

It is common for teenagers to participate in local political campaigns in Denmark. Recently a 24-year-old person was elected as a mayor. In a sense, the anti-tax movement may have been a form of dynamism in Danish politics. If the defects in the Danish taxation system which were pointed out through the anti-tax movement had been left as they were, Denmark would not have developed to the level of a welfare state that it is today.

On the other hand, it is also true that sustainability of the Nordic model in relation to anti-immigrant movement has come under scrutiny. However, the Danish people continue their efforts to overcome this challenge through daily political participation.

In other words, Denmark has confronted and carried out fiscal democracy. The high voter turnout of over 80 percent proves this is the case. This is what Japan should learn first of all.

* The information contained herein is current as of October 2019.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.

Profile

Shintaro Kurachi
Senior Assistant Professor, School of Political Science and Economics, Meiji University

Research fields:
Public finance, international comparison of public finance

Research themes:
Study of anti-welfarist trend in Denmark

Main books and papers:
◆“Environmental Taxes in Nordic Countries: The Danish Experiences with CO2 Taxes” Economia Vol. 69, The Economic Society of Yokohama, 2019
◆“Zeigen Henzai Zesei no Kozu o Yomitoku (Tokushu: Donaru Zeigen Henzai Zesei Mondai)” (Understanding the Structure of Rectification of Uneven Distribution of Tax Revenue Sources) The Toshi Mondai (Municipal Problems) Vol. 109, December, pp. 65-74, The Tokyo Institute for Municipal Research, 2018
◆“Denmaku niokeru ‘Nozeisha no Hanran’ no Kenkyu: Chiho Zeisei ni Chakumokushite” (A Study on the tax revolt in Denmark: Focusing on Local Taxation Systems) The Toshi Mondai (Municipal Problems) Vol. 109, June, pp. 91-105, The Tokyo Institute for Municipal Research, 2018
◆“Worlds of Taxation The Political Economy of Taxing, Spending, and Redistribution Since 1945”
(Co-author) Palgrave Macmillan, 2018
◆“Welfare and Tax System by Anti-Immigration Party in Denmark: The Case of Tax Reform in 2004” Japanese Journal of Northern European Studies Vol. 14, pp.1-11, Japanese Association for Northern European Studies, 2018

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