How the Tax Code can Harm Women: A Japanese Case Study

Tax systems initially built to protect women and low-income spouses can actually incentivize women to exit the workforce, or devalue their labor. This can be seen in Japan, where a spousal deduction leads to a phenomenon that some refer to as the “Wall of 1.03 Million Yen.”

The “Wall of 1.03 Million Yen” (approximately $10,000 USD) refers to the maximum income one spouse can receive in order for a household to take full advantage of the spousal exemption in the Japanese income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. . In Japan, most wage earners (single or married) can take advantage of a ¥650,000 deduction on salaried income as well as the ¥380,000 basic exemption.[1] The spouse with the higher income can then claim an additional ¥380,000 spousal exemption, but only if the lower-earning spouse makes less than ¥1.03 million.[2]

Additionally, many companies offer benefits such as health insurance to the spouses of employees. However, these benefits are usually only given if the spouse’s income is under ¥1.03 million.

While this tax benefit is not the only barrier to workforce entry for Japanese women (another example being the well-documented lack of childcare facilities), it does cause significant economic distortion.

This spousal exemption discourages many women from seeking higher-paid jobs, or working additional hours that would raise their income above ¥1.03 million. In fact, a survey performed by the Japanese Ministry of Health, Labor and Welfare found that almost 60% of women who earn less than ¥1.03 million annually do so in order to keep these benefits. The Tokyo Foundation estimates that the Japanese government loses approximately ¥600 billion in annual revenue through these exemptions.

As seen in the above figure, women are less likely to work than men across all age groups, and are more likely to be a “non-regular staff” member (i.e. a part-time worker with reduced, or no, benefits).[3]

This type of system that penalizes married couples of similar incomes is not unique to Japan. In the United States, marriage penalties and bonuses exist for both high- and low-income couples. This is covered extensively in other Tax Foundation publications. The main findings show that marriage penalties affect couples with equal incomes, and bonuses occur when two people with disparate incomes marry. Similar to the Japanese case, there is evidence that lower-income earners have less incentive to work.

One of the key principles of tax policy that the Tax Foundation espouses is neutrality. “Taxes should neither encourage nor discourage personal or business decisions. The purpose of taxes is to raise needed revenue, not to favor or punish specific industries, activities, and products. Minimizing tax preferences broadens the tax base, so that the government can raise sufficient revenue with lower rates.” The Japanese spousal deduction, and any tax system that discourages work by lower-income earners, violates that tenant.

Because of these considerations, Japan should reform its current spousal exemption system. Cutting the spousal exemption and instead using the additional revenues to support low-income families would be more neutral and equitable, and would cause less economic distortion. It would have the additional positive effects of broadening the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. and encouraging workforce participation among women.

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