Per an e-mail request, except I want to move off this.
The Japan Today board has this debate going about how Japanese taxes are calculated. Myself, I don’t do these kind of debates because, like I mentioned, I am a CPA back home. So the basics of the American tax system, I would know those. Right?
I don’t do Japanese taxes of course. But I understand the basics of the Japanese personal income tax system. Especially, as a lot of it was created by an American, Professor Carl Shoup of Columbia University. It is the Shoup System, as far as I’m concerned. But the Japanese have tweaked it here and there, especially on the capital gains side.
From the Columbia University link above[, which had originally appeared in the obit from the New York Times,]
In 1949, an aide to General Douglas MacArthur invited Professor Shoup to Japan to help overhaul the tax system. In the late 1800’s, the Japanese had adopted both corporate and individual income taxes, but in a tour of the country, Professor Shoup heard complaints that the system was arbitrary. To remedy this, he and six other economists, a team known as the Shoup Mission, proposed a system under which companies that kept detailed records and filed an annual tax report would be freed from onerous audits and could take advantage of various tax breaks, including the ability to carry losses in bad years to offset taxes during highly profitable years. He had the forms printed in blue, after being advised that the Japanese like blue documents, as part of his effort to encourage voluntary compliance. The Japanese Diet enacted his proposals in 1950.
In recognition of his contributions, Emperor Hirohito twice decorated Professor Shoup with the Order of the Sacred Treasure. In 1991, the Toyota Motor Corporation gave $2 million to Columbia to endow a chair in Professor Shoup’s name.
So what Shoup recommended here was basically the progressive income tax. Later was tacked on a consumption tax (started at 3%, then went to 5%.) Professor Shoup went around the world advising on that.
Back to the specifics of Japanese personal tax.
Over on Japan Today, someone has confused gross income with taxable income. They appear furthermore to have confused an average tax rate with a marginal tax rate. This is one of that group that doesn’t want to pay into the Japanese National Health Insurance, and about the only reason I am putting up a post.
The city of Nagoya here produced a a very nice one-pager about how Residence or Resident’s Tax (one of the main income taxes in Japan) is calculated.
Here is a picture of it, too. These are all clickable, by the way:
Some nice person in Nagoya took a long time to put this thing together, and if you are interested in the topic, you should study it for a while.
The National Income tax here works similarly to the Residence tax—it’s really the other way around actually–but the same basic formula. The idea is that from your gross (total) income is subtracted a fairly large exemption. This exemption is based on nothing more than the fact that you have earned income. You don’t have to “find” things to claim it. You just get it.
After that, you are allowed to take other deductions from your gross income. In my 3,000,000 yen example yesterday, I took a statutory 380,000 yen personal exemption, and the deductions for pension and health insurance. (It’s an example, so your mileage may vary.)
So out of 3,000,000 yen gross, the taxable income was just 1,263,000 yen. It’s taxed at a rate of 5%, per this one stripped-down website’s chart. Or you can just look in the government’s own 2008 Income Tax Guide for Foreigners instruction booklet. The National Tax Agency here likes to move links around, so it’s my own PDF download. The standard deduction described in the Nagoya piece is on page 27-28 and the National Tax rates are on page 46.
So you see, without calculating things exactly, but taking a fairly substantial estimate, a person making 3,000,000 yen here would pay about 16% overall in taxes and mandatory contributions (pension, health) that just aren’t called tax.
One of the posters is saying that most people in Japan are subject to a 20% National Tax rate. It is said like the government is taking 20% (average), but the poster probably is just being sloppy, and really means that the top yen is taxed at that rate (marginal).
But this simply isn’t true. For one, that earned income standard deduction (pages 27-28) goes up for every extra yen you earn. So you never pay an additional 20%, because your standard deduction went up as well. This is his/her major fault, by the way. They ignore the fact that Japan grants this substantial standard deduction. So a 3,300,000 yen taxable income might require a 6,000,000 yen gross income to achieve. Is the entire Eikaiwa community making 6,000,000 yen a year? Only if God is answering a ton of prayers lately.
Here’s my estimate of what this looks like for a single person, by the way.
And 5 million:
Is it 100% exact? No. But probably damn close. Total overall tax and contributions bite is 18%. Not 50%.
I also read that there is a big debate over there about what percentage of taxable income the ward charges you for kokumin kenko hoken premiums. I am using 8%. It’s close to what Shibuya Ward charges me, and it’s consistent with everything I’ve read in my several years here.
I want to point out that, in my 6 million yen example above, the 8% of previous years’ taxable (assuming no changes year-over-year) is 274,376 yen. In the 3,000,000 yen example yesterday, it was closer to 100,000 yen.
VivaVida! sells you the ambiguous expat policy for 57,500 yen a year
Might I suggest that this fact is what has the Free Choicers like Ronald Kessler up in arms? They don’t want to pay this extra money to the Japanese. That’s why Ronald and the gang are focusing on how much he contributed to the noise pollution issue or running a small business. And the other ones out there either knock the Japanese system or say “it’s fine for the Japanese but we should have our owwwwwwwwwnnn!” (In other words, separate but equal.)
Because what these people are is the equivalent of tax dodgers. Even if the “tax” isn’t a tax per se, but a mandatory charge as part of mandatory participation.
The 6 million yen earner isn’t a bigger health risk than the 3 million yen earner. The 6 million yen man pays more because he makes the 6 million. That’s how the system is set up.
So if a company can come along and let people free ride, then they want to take this ride.
Personally, I think what they’re doing smells. It smells really bad. And it just encourages the Japanese, in turn, to make up little, and not-so-little, special-rule discriminations against the foreign residents here.
Rather than everybody abide by the same rules.
Rather than all of us be in the situation together.
I am sure there are Japanese dodgers and cheaters out there. But I don’t really feel that fact is as solid the excuse that some of this gang uses. It just sounds like the language of tax cheaters. I am sure there were tax cheaters in Ancient Rome, in Feudal Europe, and certainly today in America. I just don’t see what it justifies exactly.
And this “50% goes to taxes!” line. Well, look at the example above. What’s the missing 32%?
You guys are full of beans.