The Current Status of the Earned Income Tax Credit in South Korea and the Implication to Japan―Earned Income Tax Credit or Reduced Tax Rate? ―

5――Implication to Japan

Currently, Japan explores possibilities for improvement in functions of the existing safety net. The South Korean EITC, which has been explained in this paper, is a meaningful case to review. In fact, scholars in Japan have paid interests to the EITC and discussed necessity of the system and adverse effects in case of introduction of the EITC. Morinobu (2008) suggests following four points as tasks in case of introduction of the EITC.

（１）To establish policy goals and clarify the target class to support
（２）To discuss and review the system and policies thoroughly and avoid incoherent policies
（３）To come up with measures against abuse of the system and the illegal receipt
（４）To establish structure for clear understanding of the income information as the tax office is in charge of operation and providing incentives

Applying these points to Japanese system, first, in terms of（１, setting working women and young households as the main target for the policy and establishing the same policy goals like South Korea has done are meaningful. Similar to South Korea, the number of the working poor among female workers and young households is increasing rapidly with the expansion of non-regularization of labor force in Japan. In addition, recently the South Korean government introduced ‘Differentiated policies on the EITC based on the number of children.’ As Japan has the same problem of declining number of children, it is a good policy to consider.

For （２, both countries need to implement policies that create the long and stable employment for as many people as possible rather than incoherent and money-pouring policies, and it is a shortcut to secure public finance. Waste of financial resources needs to be prevented under the context that pouring money is easier than creating stable employment.

For （３)and （４, Japan needs to utilize ‘My Number System’ which has been implemented since January 2016. However, even though South Korea introduced universal ‘Resident Registration Number ID System’ before Japan and is able to comprehend individuals’ properties and savings, illegal receipt is happening in South Korea and grasping incomes of the self-employed still remains as an issue for government. Considering the South Korean cases, Japan needs to establish more effective system.

Some people state that the EITC needs to be implemented as an alternative plan for the reduced tax rate system. The Abe administration accepted the proposal of Komeito and decided to raise consumption tax rate to 10% in the near future and introduce a reduced tax rate system. However, there are a few dissenting voices from economists on the reduced tax rate system. Reasons for opposing the reduced tax rates are ‘increase of political lobbying on the new reduced tax rate system,’ ‘misallocation of resources due to distortion in price system,’ ‘tax reduction is bigger for high-income earners with high consumption level, so the system is beneficial to high-income earners,’ and ‘failed cases in foreign countries.’

December 10 2015, Liberal Democratic Party and Komeito compromised to expand coverage to ‘all perishable foods and processed foods’, excluding alcohol and dining-out items. If the reduced tax rate is introduced and the new consumption tax increase to 10 % from 8 % is implemented, the government will lose about 1 trillion yen of its expected tax revenue. A part of the revenue shortfall will be covered by utilizing 400 billion yen earmarked for measures to help low-income earners, but no decision has been made on how to secure the remaining 600 billion yen. If financial resources for the remaining part are not secured, the government might consider reducing social security expenditures.

In fact, 1 billion yen, the cost of introducing the reduced tax rate, is comparable to 1.3 billion yen, the estimated cost of introducing the EITC by Shiroishi in 2010. Kawaguchi (2015) explains that there is no big difference between the costs of implementation of the reduced tax rate and the EITC based on the estimated result. He argues for feasibility of the EITC in Japan and necessity of active discussions for implementing the system.

The fundamental intent of the reduced tax rate is ‘countermeasure for low-income earners’. However, there are other countermeasures for low-income earners. The EITC which was introduced in this paper is a good example. The EITC boosts the labor force participation rate in the labor market. Not weighted to the reduced tax rate system, Japanese government needs to review and consider the EITC which have shown certain results in the US and South Korea at the same time and implement more effective policies.

References
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Japanese

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The Current Status of the Earned Income Tax Credit in South Korea and the Implication to Japan―Earned Income Tax Credit or Reduced Tax Rate? ―

5――Implication to Japan

Kim Myoungjung