• Analysis
  • December 14, 2018
  • 9 minutes
  • 0

Japan’s rural tax scheme led to a small town bun fight. Can it be fixed?

The "hometown tax" lets you redirect money toward needy rural communities

Ten years after launching a first of its kind experiment to secure donations for cash-strapped regions, the Japanese government is being forced to rework the law.

The problem? Local governments have been offering increasingly extravagant “thank-you gifts” to would-be contributors in a bid to compete for their generosity.

To complicate matters, even though these rewards usually are a sample of fresh produce or other items from the grateful local area, some administrators have sourced products from an entirely different region.

Now some experts are calling for even broader changes to ease the competitive tension and ensure local governments can get a fairer share of the tax take.

Demographic challenges

The scheme is called furusato nozei, a Japanese term that roughly translates as “hometown tax payment”.

Launched in 2008, it gives people in Japan the option of redirecting a share of their tax bill to a specified town or region. While the scheme plays to the sentiment of continuing to support one’s hometown even after moving to a bigger city, in practice the contributions can be sent to any town or region of the donor’s choice.

The scheme is one way in which Japan has sought to address its serious demographic challenges. Due to low birth rates and long life expectancy, combined with a reluctance to embrace immigration, Japan faces an ageing and declining population in coming decades.

The trend is more pronounced outside the big cities — such as Tokyo and Osaka — to which many working-age taxpayers relocate for employment or study opportunities.

Except for the first 2,000 yen ($17.65), the value of furusato nozei donations can be deducted from a person’s income tax and residence tax liabilities. To avoid abuse, there are upper limits on such donations depending on the person’s income.

Soon enough, regional and local governments began offering thank-you gifts as a way of attracting donations to their areas. This practice also spawned an array of online shopping-style websites allowing potential donors to choose a home for their donation based on their desired “gift”.

For example, the privately run site www.furusato-tax.jp shows a donor can expect to receive a 600 gram roast beef set by donating 10,000 yen ($88.20) to the town of Ikeda in the northern prefecture of Hokkaido.

The same donation, if made to Akune City in the southern prefecture of Kagoshima, could attract 10 kilograms of oranges.

At the upper range, there have been cases of some governments offering computers, wedding photography packages and even camper vans.

The central government has made a number of non-binding requests to local governments over the past few years to rein in the gift scheme, fearing that the competition had become too intense.

The scheme has become “more like a government-subsidised mail order business” than a donation program, Hitotsubashi University Professor Motohiro Sato lamented in a recent article.

Still, the scheme remains very popular, with contributions totalling 284 billion yen ($2.5 billion) in the year to March 2017 — an increase of nearly 70 per cent compared with the previous year. There were about 12.7 million individual donations throughout the year.

Shifting social contracts

Hirosaki University Professor Anthony Rausch, a social science specialist whose research focuses on rural Japan, argued the furusato nozei scheme involved a shift in basic ideas about society.

He described paying taxes as an act of citizenship. “It is one of the most powerful statements that a citizen can make in terms of offering his or her consent to be governed,” he said.

Normally, taxpayers could not determine specifically how their contributions would be used, nor could they expect any specific or individual benefit by virtue of paying taxes.

Furusato nozei, however, called this fundamental premise of taxation into question, Rausch said. Some municipalities and prefectures allow you to pick specific policy areas to allocate your cash. Meanwhile, the program lets citizens partially “opt out” of standard taxation.

“This breaks the contract of citizenship,” Rausch said, “the aspect of universality with what is, in the case of taxes, offered to society and then returned to society.

“From the standpoint of the individual, a fundamental act of citizenship has been altered.”

Rausch suggested that the scheme also altered the levelling function of the central government normally achieved through formulaic or debated distribution of collected money. This could cause tensions in the relationships between local governments as they must increase their competitiveness to receive funds.

“The winners, whether by virtue of attractive location or some desirable commodity, will thrive — collecting tax payments from around the country. On the other side, the losers — those that do actually need the local allocation tax provided by the government — will suffer.”

The fix is in

It has become increasingly clear to bureaucrats in Tokyo that changes are needed.

The Internal Affairs and Communications Ministry has urged local governments to cap the gift value at 30% of the original donation.

While many countries allow citizens to make tax-deductible donations to charitable causes, Japan is believed to be the only country to operate a scheme of this nature and is therefore still finding gaps in the original legislation.

The same ministry published a survey in September this year that underlined the need for reforms with legal teeth. About one in seven of the country’s municipalities were still offering gifts over the suggested 30% limit, the study found.

As a result, Seiko Noda, the then Minister for Internal Affairs and Communications, announced that the government would seek to amend the law in the first half of next year to prohibit excessively valuable gifts and also ensure they had to be produced locally.

“If these outliers are allowed to continue as is, unfortunately the whole scheme could be undermined,” she said at the time, according to a translation by Kyodo News.

Rausch argued the government should contemplate a wider overhaul.

“I think that the notion of furusato that makes the program work — i.e. the citizen who says ‘yes, I think I will participate so as to help out a rural area that could use some additional tax revenue’ — should then be universalised,” he said.

“A formula could be worked out where the contributions are pooled and distributed based on an objective formula, with a portion of each contribution going to a designated area with the return gift.

“This eliminates the ‘all or nothing’ aspect: my 100 units of contribution will be split up in such a way that part of it ‘purchases’ the desired good of an area that can benefit from such a purchase. I get my participation gift, and the rest goes into the pool of contributed money to be distributed according to a rural revitalisation formula.” — Daniel Hurst

(Picture credit:Schellack/Wikimedia Commons)


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