Invisible Costs: The Transparency Gap in Japan’s Tax Benefits

The Japanese government’s recent introduction of a 40,000-yen tax cut, aimed at alleviating the burden of inflation on households, has thrust taxation into the spotlight. This initiative, impacting 95 million people (76% of the population), highlights the growing prominence of tax policy in the political agenda – a trend underscored by the selection of the kanji character for “tax” (“zei” – 税) as the Kanji of the Year for 2023. However, while tax cuts dominate headlines, the true costs and implications of these measures remain murky, revealing a significant gap in transparency and accountability.

Government spending is often thought of in terms of direct cash payments. However, tax benefits, also known as tax expenditures, similarly reduce public resources, albeit with far less visibility. Tax expenditures include tax credits, exemptions, deductions and other reductions in tax liabilities intended to promote specific policy goals. Japan stands out as one of only two G20 countries, alongside Saudi Arabia, that does not report the cost of such tax benefits in a comprehensive and official tax expenditure report. According to the Global Tax Expenditures Transparency Index published by the Council on Economic Policies and IDOS, Japan ranks 94th out of 104 countries on tax expenditure transparency.

Japan is not completely opaque when it comes to tax expenditures. Since the passing of the 2010 “Tax Transparency Act,” the Ministry of Finance (MoF) does report on “Special Tax Measures.” The latter, however, only capture a subset of the country’s tax expenditures, because they predominantly focus on business-related tax incentives. This leaves most household-related tax benefits such as the recent 40,000-yen tax cut as well as other types of tax expenditures such as those related to consumption taxes, out of the scope of government reports.

On top of this narrow focus, the MoF does not report on all Special Tax Measures. According to a 2014 report by the Board of Audit of Japan, there are 385 such measures in Japan. Yet, the most recent report on Special Tax Measures (2022) by the MoF, only lists 81 provisions, all from the Corporation Tax Act. Benefits channeled through other taxes, such as inheritance taxes, excise taxes, customs duties, and consumption taxes, are not included.

Further complicating the issue, MoF’s figures do not estimate the cost of these tax benefits by calculating the revenue forgone as it is done in most countries. Instead, it reports only the “applicable amount”. This applicable amount refers to the total amount of income or the total value of transactions to which a tax benefit applies, but it does not reflect the financial loss to the government in terms of revenue forgone. For instance, consider Japan’s special tax measures for research and development (R&D) expenses (特別試験研究費の額に係る税額控除). The applicable amount would be the total amount of R&D expenses that qualify for the tax deduction, while the revenue forgone would be the difference between the tax the government would have collected without the R&D deduction and the actual tax collected with the deduction in place. Revenue forgone figures would be more useful to the government and the public since they would more accurately reflect the size of support offered to companies investing in R&D and the revenue impact of this support. It would also allow the government to better understand how their policies compare to the policies implemented in other countries.

A 2018 report by the Ministry of Economy, Trade, and Industry does have a broader scope, covering 159 tax expenditures, and does also provide estimates of revenue forgone. This report includes provisions like the exemption of interest on small public loans for persons with disabilities or the special deduction for specific renovation work on existing homes from taxable income. The report estimated total revenue forgone at 10.1 trillion yen, which was equal to 1.8% of Japan’s GDP and 15.7% of its tax revenue. Notwithstanding this significant amount, this one-off report still fell short of reporting all 385 measures identified by the Board of Audit, as it only included revenue forgone figures for 143 provisions, and did not cover consumption tax expenditures. This leaves the true cost of all tax expenditures in Japan unknown.

In contrast, the leading countries in the same transparency index where Japan ranks 94th not only report the revenue forgone for both business and household tax expenditures, but also regularly evaluate the cost-benefit of many of these provisions. This practice provides a clearer understanding of the fiscal impact and the effectiveness of tax policies in achieving their intended goals.

While the Tax Transparency Act is limited in scope—requiring disclosure only for business-related special tax measures and not the full spectrum of tax expenditures and their revenue forgone (Article 4, paragraph 2)—this constraint should not absolve the Ministry of Finance from pursuing greater transparency. In many other countries, governments exceed legal requirements to ensure comprehensive reporting. For Japan to align with international standards, it is crucial to expand tax expenditure reporting to include estimates of revenue forgone across all expenditures, make this information readily accessible to the public, and regularly assess the cost-benefit of these tax policies. Broadening the Act’s scope, along with more proactive efforts from the Ministry of Finance and the National Tax Agency to fully account for the fiscal impact of tax expenditures is necessary to enhance transparency and accountability on tax policies in Japan.

Related Posts

Evaluation of Tax Expenditures. Conceptual Frameworks and International Experiences

Agustin Redonda, Christian von Haldenwang and Sofia Berg | 28 November 2023
Fiscal, Discussion Notes | Tags: GTED, Latin America, Tax Expenditures
This report provides an international overview of the state of tax expenditure evaluations, showing that it remains relatively underdeveloped, not only in Latin America and the Caribbean, but also across... continue reading

The Global Tax Expenditures Transparency Index Companion Paper

Agustin Redonda, Lucas Millan, Christian von Haldenwang and Flurim Aliu | 3 November 2023
Fiscal, Discussion Notes | Tags: GTED, GTETI, Tax Expenditures
The GTETI Companion Paper describes the 5 dimensions and 25 indicators that make up the recently launched index, together with the scope and methodology used.... continue reading

New Blog Series: Tax Expenditure Policy Making and the Role of Parliaments

Agustin Redonda | 1 November 2023
Fiscal, Blog | Tags: GTED, GTETI, Parliaments, Tax Expenditures
Given the importance of the role of parliaments when it comes to tax expenditures policy making, CEP is launching a blog series to shed further light on this topic from... continue reading

The Global Tax Expenditures Transparency Index (GTETI): Taking Tax Expenditure Scrutiny to the Next Level

Council on Economic Policies | 10 October 2023
Fiscal, News | Tags: Tax Expenditures, Tax Reforms
According to the overall GTETI score, South Korea, Canada and the Netherlands rank top among the 104 assessed countries.... continue reading

A Lack Of Transparency. Do You Know About The Taxes Your Government Does NOT Collect?

Christian von Haldenwang and Agustin Redonda | 20 January 2020
Fiscal, Blog | Tags: Tax Expenditures
All over the planet, governments are desperate for funds to finance social policies, public infrastructure and development projects. Yet, the very same governments routinely forego huge amounts of tax revenues... continue reading