Grasping Income Information in Real Time: Points of Debate Regarding Administrative Digitalization

OGURO Kazumasa
Consulting Fellow, RIETI

The real purpose of the establishment of a Digital Agency, scheduled for September 2021, is not to digitalize administrative procedures. Digitalization is no more than a means to an end. The real purpose of developing a digital government is realizing high-quality administrative services by reforming services and organizational structures as a whole.

In the field of government finance, what should Japan aim to achieve by developing a digital government? Government finance has three functions—allocation and redistribution of resources, and economic stabilization—and this article focuses on the redistributive function.

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The objective of the redistributive function should be, first and foremost, ensuring reliable provision of benefits and fair burden-sharing. The use of digital technology is starting to make it possible to achieve this objective with greater precision. The keys to accomplishing this objective are the elements of "making redistribution visible," "grasping income information in a timely manner," and "promoting push-type services."

What does "making redistribution visible" mean? We are not getting an accurate overall picture of redistribution in the first place. For example, according to one research report, while around 50% of single-mother families are below the poverty line, the public livelihood protection program covers only around 20% of them. While inefficient redistribution affects the public's opinion regarding whether or not to implement a tax hike, the public livelihood protection program's strong tendency to make wasteful payouts while failing to provide relief to people who actually need support is a frequent point of discussion.

For example, according to an international comparison (see the table below) regarding income redistribution to households in the bottom 20% of the income ladder in the mid-2000s presented in a report titled "Growing Unequal?" by the Organization for Economic Cooperation and Development, the level of redistribution in Japan was no more than comparable to the level in the United States, which is viewed as a stratified and highly unequal society. The share of income transfers to the lowest 20% of income earners was 2% in Japan and 1.9% in the United States, compared with 5.8% in Australia on a net basis, that is, if the share of tax payments and social security contributions are deducted from the share of transfers.

Redistribution to the Bottom of the Income Ladder (mid-2000s, %)
Redistribution to the Bottom of the Income Ladder (mid-2000s, %)
Note: (iii) = gross transfers (ratio of transfers to disposable income); (vi) = share of transfers to the bottom 20% of gross transfers; (v) = gross payments (ratio of payments to disposable income); (iv) = share of payments by the bottom 20% of gross payments (some figures were rounded off.)
Source: "Growing Unequal? Income Distribution and Poverty in OECD Countries" (OECD, 2008)

There are two reasons for the differences between Japan and Australia. First, the ratio of cash transfers from the government sector to all households, to the total disposable income of the entire population, is higher in Japan (19.7%) than the ratio in Australia (14.3%), but the share of transfers to the bottom 20% to the total amount of transfers is only 15.9% in Japan against 41.5% in Australia.

Meanwhile, the ratio of taxes and social security contributions paid by all households to the total amount of disposable income of the entire population in Japan (19.7%) is not much lower than the ratio in Australia (23.4%). However, the share of payments by the bottom 20% in Japan, at 6%, is far higher than the share of 0.8% in Australia. This means that while Australia's redistribution is well designed to concentrate transfers toward people who really need them, Japan's is not. It is inefficient. To correct the distorted redistribution in Japan, it is necessary to visualize the overall picture of redistribution based on real-time income data. One fundamental key to doing that is digitalizing tax enforcement, which will enable the timely provision of income information.

In Japan, it is difficult to promptly provide financial benefits to the right people, as was true of the income-based cash benefits that the government temporarily considered around April 2021 in response to the COVID-19 crisis. The greatest reason for this difficulty is the absence of timely methods of obtaining information on the people's income before redistribution.

For example, in 2013 the United Kingdom, which has been digitalizing taxation procedures, put into practice the Real Time Information (RTI) system regarding income tax. In the United Kingdom, which has a system similar to Japan's, which withholds tax at the payment source, employers provide payroll information to HM Revenue & Customs (equivalent to Japan's National Tax Agency) each time they pay salaries to employees, using a software program authorized by the U.K. tax agency.

Australia also introduced a real-time information system regarding salary payment (STP: The Single Touch Payroll system is mandatory for employers with a workforce of 20 employees or more) in 2018. The Australian Taxation Office formulated the basic concept and developed the system in cooperation with a software company. Australia is considering making the system mandatory for all employers.

Timely income information allows for the realization of fair burden-sharing and is also useful for redistribution policy. One example is the provision of cash benefits under the COVID-19 crisis. Having timely income information makes it possible to direct benefits exclusively to people who are suffering steep income losses. If such information is unavailable, providing universal benefits to all people regardless of income level becomes an inevitable option.

Directing such benefits is similar to (i) a negative income tax scheme under which low-income earners receive cash in proportion to the level of income, while providing universal benefits is similar to (ii) a basic income scheme (minimum income protection). In theory, similar redistribution effects may be obtained through (i) and (ii) if adjustments are made through taxation. However, while (ii) makes payment to all people, (i) limits the payment to low-income earners, and therefore, the necessary additional tax revenue is much smaller for (i) than for (ii).

Taxation, whatever form it may take, undermines economic efficiency and generates deadweight loss (distortion of resource allocation). As a general rule, the amount of deadweight loss generated by a certain tax is proportional to the square of the tax rate. For example, distributing one million yen each to 100 million people per year requires funds totaling 100 trillion yen under scheme (ii) (if we assume that a one percentage point increase in the consumption tax rate increases tax revenue by 2.5 trillion yen, the necessary tax increase is 40%). The deadweight loss from the necessary tax increase equals the number obtained by multiplying the constant by the square of 40%. However, distributing 1 million yen each to 10% of the population under scheme (i) (the necessary tax increase is 4%) requires a total of only 10 trillion yen, and the deadweight loss from the necessary tax increase is much smaller, equal to the number obtained by multiplying the constant by the square of 4%.

However, to put (i) into practice, accurate income information is essential, and under the existing "analog government," there are limits to what can be done in that respect. Even so, in Japan, where withholding tax at the source is applied to compensation other than salaries and financial income, if the scope of withholding tax at the source is expanded to cover platform operators and if a system similar to RTI or STP is developed, the situation could change dramatically. If that happens, it will become possible to grasp business income, too, more promptly, by introducing cloud-based accounting and by shifting tax filing information to real-time, digital data.

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Understanding asset status is also an important challenge, but if income information is collected in a timely manner as the first step, it will become possible to promptly deliver benefits to all people who meet the eligibility criteria for benefits. It is easy to understand why gaining a firm picture of income information in a timely manner is most useful in the social security field. If the "My Number" personal ID system functions properly, administrative agencies can provide necessary services to individual users at the most appropriate timing for each of them.

To realize that situation, it is necessary to ensure that most people register necessary information in advance at the My Number portal and to link their personal ID numbers to their bank accounts.

Changes in the tax and social security systems often remain unnoticed by people who become eligible for cash benefits or tax breaks as a result of the changes. Advance registration with the My Number portal ensures that eligible people do not miss out on social security benefits and tax refunds because they fail to file applications. This means that a digital government can also function as a safety net.

The ultimate form of digital government is a one-stop window for push-type administrative services enabled by the government's direct access to the people's individual accounts. However, to realize that situation, it is necessary to increase the usage rate of the My Number portal to 90% of the population. Although the government is promoting initiatives to enable the additional use of My Number ID cards as both a health insurance certificate and a driver's license, it is necessary to enact strong incentive measures at the same time as making the use of the My Number portal mandatory for civil servants.

At present, the procedures for tax and social insurance payments by employees are entrusted to the employing companies in most cases. However, if the function that allows for linking the My Number portal with external sites is used, it is possible to check pay slips via the portal. One idea worth considering is to grant preferential treatment, such as a corporate tax cut of 1-2% or tax credit for expenses, under a provisional measure with a sunset clause of around five years, when companies establish data linkages between their employees' pay slips and the My Number portal, or when listed companies disclose the establishment of such linkages in financial statements.

I hope that in order to achieve optimal redistribution and to correct inequality, the government will pave the way for a new redistribution policy and a new social security system by establishing the Digital Agency and realizing a digital government.

>> Original text in Japanese

* Translated by RIETI.

May 28, 2021 Nihon Keizai Shimbun

August 6, 2021