Ryo Ishida: Japan’s Hometown Tax Payment System as an Analog for a Public Contribution System
One of the ideas I consider the most important is the idea of a public contribution system that expands the nonprofit sector instead of expanding the government beyond the current substantial levels of government in rich countries. (See my bibliographic post “How and Why to Expand the Nonprofit Sector as a Partial Alternative to Government: A Reader’s Guide.”) My former student and University of Michigan PhD Ryo Ishida pursued this idea in his dissertation, and I am pleased to have a guest post from Ryo today on an aspect of the Japanese tax system that provides relevant empirical evidence for the design of a public contribution system–perhaps in part by illustrating what not to do.
Japan’s Hometown Tax Payment System is not about a large tax incentive for donations to private sector activities that can provide a partial substitute for government activities, but a large national tax incentive for donations to local governments. It enhances voluntary contribution to local governments.
Note that this post is his personal opinion and does not necessarily reflect the opinions of the organizations to which he belongs.
Hometown Tax Payment System in Japan — Individuals and Corporations
1. The Introduction of Hometown Tax Payment System for individuals.
The Hometown Tax Payment System (HTP System hereafter), or Furusato-Nozei System in Japan is a system introduced in 2008 that aims to encourage individuals to donate to local governments, i.e. municipalities and prefectures [1]. Before the implementation of HTP system, individuals who had donated could only enjoy taxable deductions. However, under the HTP system, individuals who donated more than 2,000 yen (approx. USD 20) can have their national and local income tax reduced drastically. The amount of tax credit a taxpayer can enjoy is the amount of donation minus 2,000 yen and is capped based on the individual’s income [2]. Roughly speaking, the upper bound of tax credit one can enjoy is approximately proportional to one’s taxable income. A detailed calculation is explained in [2]. If one’s donation is lower than the calculated upper bound, you may see that the taxpayer can enjoy almost a 100% tax credit. In such a case, one might see that this system is equivalent to a tax-transfer system, where one can shift a portion of her tax liability to local governments the taxpayer chooses. Roughly speaking, under the HTP System, a taxpayer can pay a portion of her tax liability to her hometown instead of paying it to the local government where she resides. Note that, although the HTP system is named “furusato (hometown)”, individuals are allowed to donate not only to their actual hometowns but also to any municipalities and prefectures. As a result, donations to devastated areassurged in 2011 after the Tohoku Earthquake.
This HTP system has attracted attention. The Economist [3] described the response as “overwhelming.” Although the amount of donations started at 8 billion yen (approx. USD 800 million) in 2008, it grew to 14 billion yen (approx. USD 1,400 million) in 2013, 39 billion yen (approx. USD 3,900 million) in 2014, and 165 billion yen (approx. USD 1.65 billion) in 2015 [4].
Brockmann et al. (2016) [5] stated that the HTP System is an immaterial tax rewards system that mitigates the nuisance of paying taxes. An immaterial tax rewards system includes a system that allows taxpayers to allocate a portion of their tax liability to a designated purpose, such as the Spanish system that allows taxpayers to allocate 0.7% of their tax liability to churches, charitable organizations or state organizations [5] or Hungarian Percentage Philanthropy that allows them to allocate 1% or 2% of their tax liability for a charitable purpose [6]. Although restricted to contributions to local governments, the HTP System might seem to be similar to Spanish or Hungarian system. However, there is a key difference between them, which makes the HTP System unique to Japan.
2. Rewards for Contributors. Although the Hungarian system was referred to when introducing the HTP System [7], a prominent feature in the HTP System is that many local governments reward the contributors by sending gifts, such as regional goodies. In a newspaper article posted on Jan 31, 2016 [8], it was noted that growing number of local governments reward contributors, with survey evidence showing that 84% of local governments rewarded contributors by sending gifts in autumn 2015 where 52% of them had done so in autumn 2013. Another newspaper article on Jun 18, 2016 [9] reported that, in 2015, the total value of these gifts was 63 billion yen (approx. USD 6,300 million) and postage costs were 4 billion yen (approx. USD 400 million) while total donations were 165 billion yen (approx. USD 1.65 billion). Therefore, it deduced that approximately 40% of donations were used for gift-related expenses. Hashimoto and Suzuki (2015) [10] explained that contributors may obtain financial gain under HTP System, by providing an example that a taxpayer may get 48 thousand yen as gain if she donated 100 thousand yen, enjoyed a 98 thousand yen tax credit, and obtained a gift whose value was 50 thousand yen. Then, a natural question could be whether such gifts attract individual contributions empirically. Nishimura et al. (2016) [11] reported that gift is certainly a positive determinant for individual contribution though there are several other positive determinants, such as availability of credit card transaction or local government’s explicit explanation about how to use contributions.
There are pros and cons for such rewards. For example, the Ministry of Internal Affairs and Communications surveyed local governments’ opinions about the HTP System [12]. In this report, although 668 local governments perceive that HTP System enables local governments to advertise themselves, 286 local governments have concern about competition in gift rewards. One media editorial on May 16, 2016 [13] claims that the HTP System fosters new industries in local area, while another media editorial on Jan 31, 2016 [14] argues that too much competition in gift rewards deviates from original purpose of HTP System. Taking into account this situation, the Ministry of Internal Affairs and Communications asked local governments in 2015 to refrain from sending expensive gifts and cashable gifts [15], and some local governments abolished rewards or reduced the value of gifts [9].
Gifts are not the only spur for contributions. A spate of revisions to the system sought to encourage individual donations.
3. The Hometown Tax Payment System, Past and Present. When the HTP System was introduced in 2008, the maximum tax credit one could enjoy was one’s total donation minus 5,000 yen. This system was revised in 2011 so that the maximum tax credit became the total donation minus 2,000 yen. Although the increase in donations in 2011 can mainly be attributed to the Tohoku Earthquake in Mar 11, 2011 [10], this systemic revision should theoretically have increased individual contributions.
In 2015, the HTP System was revised again. First, the upper bound of the tax credit, which is positively related to one’s income, was approximately doubled. Second, certain people became exempted from tax reporting even if they donated under HTP System. The first of these reforms increased the financial incentive for contributions, while the second encouraged contributions by simplifying procedures.
4. The Hometown Tax Payment System for Corporations. In 2016, the HTP System was expanded to corporations. Even under the previous system, donating corporations enjoyed a tax deduction and thus could reduce their tax payment by about 30% of the value of their donations. Under the HTP System for corporations, donating corporations enjoyed an additional 30% tax credit. Therefore, under the HTP System for corporations, donating corporations could reduce their tax liability about 60% of the value of their donations. A Corporation could contribute to local governments except for designated rich local governments and local governments where it had its headquarters. Before receiving this donation, local governments must clearly specify how they would use such donations and receive the national government’s approval. The HTP System for corporations is different from that for individuals since gifts or financial rewards from local governments receiving donations to the donor corporations are prohibited [16][17]. I am eagerly awaiting the evidence on how this change will affect corporate donations.
5. Conclusion. Although the HTP System has attracted attention, comprehensive treatments in English, especially for economists, are rare. An exception is an article in Japan Times [18], but it did not mention the HTP System for corporations nor did it mention the surge of donations in 2015, because the article was published on Oct 20, 2014. Annual statistics for the HTP System are currently available on the Ministry of Internal Affairs and Communications website [4]. I hope many economists take an interest in this Japanese experiment in tax policy.
Notice: This article is only for research purposes. The views expressed herein are those of the author and do not necessarily reflect the opinions of the organizations to which the author belongs. Any remaining errors are solely the responsibility of the author. Contact information: rrishida137035@gmail.com.
References
[1] Webpage of Ministry of Internal Affairs and Communications in Japan, http://www.soumu.go.jp/main_sosiki/jichi_zeisei/czaisei/czaisei_seido/furusato/about/ , in Japanese, retrieved on August 14, 2016
[2] Webpage of Ministry of Internal Affairs and Communications in Japan, http://www.soumu.go.jp/main_sosiki/jichi_zeisei/czaisei/czaisei_seido/furusato/mechanism/about.html , in Japanese, retrieved on August 14, 2016
[3] The Economist (April 18, 2015) “Japan’s rural regions Hometown dues”
[4] Webpage of Ministry of Internal Affairs and Communications in Japan, http://www.soumu.go.jp/main_sosiki/jichi_zeisei/czaisei/czaisei_seido/furusato/archive/ , in Japanese, retrieved on August 14, 2016
[5] Brockmann, Hilke, Philipp Genschel, and Laura Seelkopf (2016) “Happy taxation: increasing tax compliance through positive rewards?” Journal of Public Policy 36 (3), pp. 381-406
[6] Török, Marianna (2004). “Percentage philanthropy: an overview” In Percentage Philanthropy, edited by Marianna Török and Deborah Moss. Hungary. NIOK Foundation.
[7] The Tax Commission (2009), Webpage of Cabinet Office, http://www.cao.go.jp/zei-cho/history/2009-2012/gijiroku/zeicho/2009/__icsFiles/afieldfile/2010/11/22/21zen8kai16.pdf , in Japanese, retrieved on August 17, 2016
[8] Mainichi Shimbun newspaper (2016), http://mainichi.jp/articles/20160131/k00/00e/040/114000c , in Japanese, retrieved on August 17, 2016
[9] Nikkei Shimbun newspaper (2016), http://www.nikkei.com/article/DGXLASFS17H6H_Y6A610C1NN1000/ , in Japanese, retrieved on August 17, 2016
[10] Hashimoto, Kyoji, and Yoshimitsu Suzuki (2015) “Verification of Hometown Tax Payment System,” 72nd Annual Conference of the Japan Institute of Public Finance, in Japanese
[11] Nishimura, Yoshitomo, Tomoko Ishimura, and Nobuo Akai (2016) “Analysis about Incentive of Hometown Tax Payment System,” 24th Annual Conference of the Japan Association of Local Public Finance, in Japanese
[12] Webpage of Ministry of Internal Affairs and Communications in Japan, http://www.soumu.go.jp/main_sosiki/jichi_zeisei/czaisei/czaisei_seido/furusato/file/report20151023.pdf , in Japanese, retrieved on August 17, 2016
[13] Nikkei BP (2016), http://www.nikkeibp.co.jp/atcl/tk/PPP/030700027/042800003/?P=1 , in Japanese, retrieved on August 19, 2016
[14] Mainichi Shimbun newspaper (2016), http://mainichi.jp/articles/20160131/k00/00e/040/114000c , in Japanese, retrieved on August 19, 2016
[15] Webpage of Ministry of Internal Affairs and Communications in Japan, http://www.soumu.go.jp/main_content/000351771.pdf , in Japanese, retrieved on August 17, 2016
[16] Website of JTB, https://furu-po.com/business , in Japanese, retrieved on August 17, 2016
[17] Website of Cabinet Secretariat, http://www.kantei.go.jp/jp/singi/sousei/meeting/tihousousei_setumeikai/h28-01-14-siryou4-1.pdf , in Japanese, retrieved on August 17, 2016
[18] Japan Times (2014), “Hometown ‘tax’ donations system catching on,” http://www.japantimes.co.jp/news/2014/10/20/reference/hometown-tax-donations-system-catching/#.V7R_C5iLTIU , retrieved on August 17