The "Annual Income Barrier" Issue: Careful discussion based on data is necessary

Faculty Fellow, RIETI

The issue of the "annual income barrier," in which married women limit their annual income to a certain level in order to avoid tax and social insurance premium burdens, is attracting attention. This problem itself has been pointed out for quite some time, but with the increase in the hourly wage in response to the minimum wage increase and labor shortages, the phenomenon of a decrease in operating hours as a result of higher hourly wages has become a new problem. Coupled with the expansion of social insurance coverage to part-time workers, the government has launched a package of countermeasures, and political interest is high.

The Mystery of the 1.03-Million-Yen Wall

Kondo and Fukai (2023) conducted a descriptive analysis of labor supply of married women using data from 16 cooperating municipalities' basic resident registers and resident taxation records that were joined and anonymized. Using individual-level panel data that included information on salaries and various types of income and household composition, we analyzed the data from various angles, including changes before and after life events and differences by husband's income and employment status.

The figure shows a histogram of salary income for married women created with the data used in Kondo and Fukai (2023). The vertical dotted lines indicate delineations, respectively, of the annual income amount of 1.03 million yen under which dependents are not subject to income tax, and the amount of 1.3 million yen under which dependents are not required to join the national pension and national health insurance programs as payees. The graph clearly shows that these two are the main “annual income barriers.”

The large jump in the 10,000-yen increments to just before 1.03 million yen in the graph occurs at 960,000 yen. It is the threshold at which some municipalities begin to charge the lump-sum part of local resident tax, as well as being the largest multiple of 12 under 1 million or 1.03 million yen. There is another significant jump at 1.0 million yen, which is the threshold for both the lump-sum and income-proportional elements of the resident tax in all municipalities, followed by another jump at 1.03 million yen, which is subject to the income tax, and a sharp decrease after the 1.03 million yen mark.

Distribution of salary income among married women (with positive salary income, aged between 25 and 60)
Distribution of salary income among married women (with positive salary income, aged between 25 and 60)
Note: Those who have no salaried income (26%) and those who earn more than 8 million yen (1.5%) are not included.

1.3 million yen is the maximum income limit for a spouse of an employee pensioner (i.e., salaried worker) to be a Category 3 insured person under the National Pension Plan or a dependent in terms of the spouse's health insurance. If the annually earned amount exceeds 1.3 million yen, the total annual cost of national pension insurance premiums and national health insurance premiums will be approximately 300,000 yen. Compared to an annual income of 1.3 million yen, 300,000 yen is a fairly large burden.

On the other hand, if the income exceeds 1.03 million yen, the person is no longer qualified as a dependent under the tax system and becomes subject to income tax, but the only change in the tax amount is a 5% increase in the marginal tax rate. Even when combined with the individual resident tax that is imposed when the amount exceeds 1 million yen, the annual tax burden is less than 10,000 yen, which is a small change compared to the change at the 1.3-million-yen barrier. Despite this, many people adjust their income to less than 1.03 million yen instead of 1.3 million yen.

Why do so many married women try to keep their annual income below 1.03 million yen? Often pointed out is the income limit for the spousal allowance provided by the husband's employer. However, the number of companies that provide allowances to spouses earning less than 1.03 million per year has dropped by half in the past decade, and this is unlikely to be the only explanation. Since the tax and social insurance systems are complex, there may be some aspects of work adjustment behavior that is based solely on the incorrect assumption that "if you exceed the 1.03-million-barrier, you will lose money" without an accurate understanding of the actual burden that it represents.

The issue of Category 3 insured persons and the "1.03 million-yen barrier”

The majority of recent discussions about annual income barriers are related to the burden of social insurance premiums. Indeed, while the discontinuity in the tax system has been eliminated to a large extent as a result of successive revisions of the spousal deduction, the increase in the burden of social insurance premiums when the amount exceeds 1.3 million yen has not changed for decades, so it is understandable that the current discussion focuses on the social insurance system.

As long as employee insurance covers both the enrollee himself/herself and his/her dependent spouse, the annual income barrier in the social insurance system will not disappear. Although there is a growing debate on the pros and cons of the Category 3 insured person system, I personally believe that in the long run, the Category 3 insured person system should be abolished, and the health insurance system should be changed to one in which there is no difference regarding whether or not a person has a family member to depend on.

Nevertheless, it will be hard to change the system in reality. It will be necessary to make gradual changes over time to avoid sudden shocks for those who have adjusted their employment to the traditional social insurance system.

Concurrently expanding employee insurance coverage to part-time workers would also ease friction by reducing the number of Category 3 insured persons themselves. However, if many part-time workers adjust their labor supply to keep the salary below 1.03 million yen, the monthly amount of 88,000 yen (equivalent to annual income of 1.06 million yen), which is the minimum salary for social insurance coverage for part-time workers, is not reached. I think this point is often overlooked.

Although people talk about a "1.06-million-yen barrier," there is no discontinuity in the distribution of salary income at 1.06 million yen. Since monthly wages are not the only criterion for social insurance coverage, the adjustment may be done by holding down the prescribed working hours. Yet if many married women who want to work "within the scope of maintaining dependent status" keep their annual income below 1.03 million yen, they do not reach 1.06 million yen anyway. If so, the expansion of social insurance coverage to part-time workers may have a limited effect on reducing the number of Category 3 workers.

Importance of understanding the actual situation as a basis for discussion

In considering the issue of Category 3 insured persons, we discussed the possibility that the seemingly unrelated "1.03-million-yen barrier" may actually limit the effect of expanding social insurance coverage to part-time workers. As already mentioned, many married women who try to keep their annual income within the range of their dependents consider 1.03 million yen as the threshold, even though the actual increase in the tax burden is not significant even if it exceeds 1.03 million yen.

Another important but, due to data limitations, still unknown issue, is the response of those whose annual income is between 1.06 million yen and 1.3 million yen, who are directly affected by the expansion of social insurance coverage. Are they positive or negative about becoming covered by their employer's social insurance instead of being dependent on their husbands? Perhaps they differ in many ways from those who adjust their schedules to earn incomes of less than 1.03 million yen. It is also necessary to ascertain the actual situation regarding how employers are responding in the face of the expansion of social insurance coverage.

The issue of Category 3 insured persons is closely related to the issue of the gender division of labor and is also a very difficult political issue due to conflicting interests. It is necessary to promote an understanding of the actual situation based on objective data, which will serve as a basis for calm discussion.

December 4, 2023
>> Original text in Japanese

December 12, 2023