“The wall of 1.03 million yen” relates to a proposal to reduce income (and resident) tax
As of December politicians on the national stage have proposed to break “the wall of 1.03 million yen” (103万円の壁). But what does it mean? Under the present Japanese income tax code, the borderline between non-taxed income and taxed income is set as follows:
- Basic exemption (基礎控除): 480,000yen is exempted from annual incomes of all Japanese residents(*).
- Income tax rate: For salary income earners (給与所得者)(**), if their incomes are under 550,000yen after exemptions such as Basic exemption, social security payments, or medical payments are deducted, then they are not taxed.
(*)But persons whose annual incomes are over 24 million yen are less exempted, and persons whose incomes are over 25 million yen are not exempted at all. (**)’Salary income earner’ means all employees. ‘Salary income earner’ can get a part of their salary incomes regarded automatically as a cost, that is out of taxation. Free-lance workers are out of ‘Salary income earner’ category so they need to calculate their annual cost by themselves and need to submit tax returns considering their annual cost all by themselves.
So employees have the borderline between non-taxed and taxed at 1.03 million yen, 480,000yen (Basic exemption) + 550,000yen (non-taxed income). This is “the wall of 1.03 million yen”. Now politicians propose a raise of this Basic exemption, that will realize not only more non-taxed or lower-taxed employees but also more non-taxed or lower-taxed free-lancers because Basic exemption can be applied to all residents no matter whether they are employed or not.
Whether or not “the wall of 1.03 million yen” will be broken and, if will be, to what extent, depends on the coming developments of discussions in Japanese politics. In the past 30 years “the wall of 1.03 million” has remained unchanged. The reason why is that through this period Japanese economy has bogged down in a long deflation phase so almost no increase of both incomes and living expenses. But in recent years Japanese economy has finally got into an inflation phase and living expenses has increased, and an inflation phase tends to cause an increase of tax revenue in proportion to higher prices of goods and services, so the proposal to reduce taxes in order to ease people’s living has a reasonable ground.
“The wall of 1.03 million yen” issue influences non-Japanese residents too
The proposal of this time is for all residents in Japan, no matter whose nationality is Japanese or non-Japanese. So if this proposal is approved then non-Japanese residents will also get a reduction of income tax, and in a possible outcome, resident tax too. Pension’s lump-sum withdrawal payments won’t be influenced by the proposal of this time because it does not include a proposal of a reduction of social security payments.
“The wall of 1.06/1.30 million yen” issue relates to a discussion about social security payments
Besides “The wall of 1.03 million yen”, “the wall of 1.06/1.30 million yen” is now being referred to, that makes an understanding to the discussion more difficult. “The wall of 1.06/1.30 million yen” means that to what extent Kosei Nenkin (厚生年金) should be covered and to what extent employees are obliged to pay their Kosei Nenkin instead of Kokumin Nenkin (国民年金). The two kinds of “the wall” have to do with each of two different systems so you need to understand one by one separately(*). But in the end you need to consider both because National Burden Rate (国民負担率) is derived from the sum of the burdens by the two systems.
(*) For “the wall of 1.06/1.30 million yen”, see this article of our blog (Reforms Plan 2: Kosen Nenkin covers short-time employees).
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