A tax system designed to maintain a sense of fairness for taxpayers

If you ask what tax is, I think many people will answer that it is a source of funds for various public services such as social infrastructure and social security.

That’s exactly right, and everyone understands it in their head, but you may want to pay as little as possible when it comes to actually paying taxes.

I think this is because it is difficult to realize that you have obtained what you want by paying taxes, unlike ordinary shopping where you can receive goods and services on the spot if you pay for them. In fact, the majority of people receive more services than they paid for.

So, it’s more acceptable if you think of tax as a kind of membership fee for living in society, rather than as a payment for shopping.

The membership fees should be fair, since basically everyone in this society receives similar services. So, should taxes be the same for each person? That kind of thinking is possible.

However, the amount of income varies from person to person, the difficulty of earning the same million yen is different, and whether or not he or she will be able to earn income stably in the future also depends on the person.

Therefore, the current tax system has adopted a mechanism to change the income calculation method according to the nature of income. Behind this is the idea of a burden commensurate with the tax-bearing capacity. In other words, the idea is that changing the tax amount according to each person’s income and how the income is earned will lead to fairness.

In an extreme example, if the manager of an inn travels and stays at an inn at a travel destination, the travel expenses may be recognized as deductible necessary expenses if certain conditions are met. Inspecting the same type of business can be utilized for the management of your own inn, which in turn has an impact on the increase or decrease in profits, and in some cases is considered an essential expenditure for his/her business.

At that time, even if a person who works for a company says it is strange that he or she travels in the same way and his or her travel expenses are not deductible, the expenses will not be recognized in the same way as the manager of the inn. Because it is said that the way and the nature of earning income are different between a person who runs an inn and a person who works for a company.

Of course, setting up income classifications and determining the calculation method for each individual does not necessarily mean that fairness will be achieved. It is also difficult for no one to be dissatisfied.

But it’s important to get close to what at least quite a few people feel is fair. If you lose your sense of fairness, you may strongly feel that you are losing money, which may lead to not paying taxes.

Therefore, it is very important to make a rule that such taxes will be imposed in such cases based on agreement, and to make a system in which taxes are based on it. For example, in this case, if new ways of working or new transaction methods are born, it may be difficult to maintain a sense of fairness under the conventional rules.

In other words, it is necessary to change the taxation system and change the conventional rules and judgments in response to changes in society.

New standards required for social change

There are 10 categories of income according to the cause and nature of the income, and each category is calculated differently.

There is business income and employment income within the classification. To put it simply, in business income, the expenses required to earn income are subject to income deduction, while in employment income, a certain amount is deducted from income as estimated expenses, and it is basically forbidden to deduct actual expenses, with some exceptions.

This is because, as mentioned earlier, even if you earn the same income, the nature is thought to be different.

In other words, employment income earners have restrictions and difficulties such as fulfilling their responsibilities according to the employer’s instructions and acting according to the rules of the organization, but if they do so, they are guaranteed for the time being to earn a stable income in the form of a salary.

On the other hand, a stable income is not always guaranteed for business income earners. Basically, business income earners should make various management decisions and think at their own risk as to what and how much they will spend to earn income.

Therefore, a division in which the method of calculating income is different has been created to determine whether to classify income into business income or employment income based on the presence or absence of dependence or independence on an organization such as a company.

However, in recent years, for example, there are working styles in which the remuneration is a complete commission system and the expenses are paid by themselves although they belong to a company. In other words, in working styles such as merit-based pay, there are more cases where it is difficult to classify based on traditional criteria such as dependency and independence.

Then, for example, there are various ideas such as whether it is not necessary to place too much importance on judging dependency, or whether it is also necessary to consider the viewpoint of employers. I think that what to do with the judgment criteria in this area is an issue that needs immediate attention.

In addition, the income problem caused by the winning betting ticket for horse racing, which became a hot topic in the media after a trial, is also a new problem.

In the first place, horse racing is hard to win. In fact, the hit rate is extremely low. That’s what gambling is all about: you dream of winning and buy a betting ticket to enjoy it.

Therefore, the income earned by winning is classified as an occasional income, and the purchase cost of the winning betting ticket is recognized as a deductible necessary expense.

However, thanks to the development of computers, it has become possible to improve the hit rate by making full use of them. The person who filed the suit recently also bought betting tickets worth hundreds of millions of yen over a few years, but he increased the hit rate and received a refund that exceeded the betting ticket fee.

If the income is judged to be occasional income as in the past, the only expense is the purchase cost of the betting ticket, so the amount that can be deducted from the income will be very small, and the taxable amount will be enormous.

However, he used a computer to invest in a huge number of races and achieved a hit rate that was well above average. In other words, instead of enjoying it as gambling, he was working on the purpose of earning income using a mechanism called horse racing, so he insisted that the income earned there would be miscellaneous income rather than occasional income.

When it comes to miscellaneous income, various expenses incurred to obtain it are recognized as deductible necessary expenses. In other words, the purchase cost of lost betting tickets other than the winning race is recognized as the cost to hit the target, and the taxable amount will be greatly reduced.

In this case, the court accepted his claim and determined that his income would be miscellaneous income.

I think the tax authorities were surprised by this ruling. That’s because it was common sense to classify gambling income as occasional income.

However, the development of computer technology has made it impossible to apply conventional rules uniformly.

It is important for each citizen to understand the basics of the tax system

I think many people are concerned about their tax payments increasing or decreasing. However, you may not be very interested in the criteria by which your income should be classified as a certain income.

Therefore, if it is pointed out to you that your income classification is incorrect, resulting in an increase in your tax payments, you may think that the tax authorities will change your classification in order to increase your tax payments. But that’s not true.

The tax authorities only classify by rule according to the nature of income. And that is to maintain a sense of fairness among taxpayers.

However, as mentioned at the beginning, changes in society can mean that conventional rules no longer match reality. Therefore, it is necessary to recognize such changes in the tax system and tax administration and respond to them at an appropriate time.

In fact, in Japan, tax examinations by tax offices account for 1% of all sole proprietors and 3% for corporations. However, tax examinations are not the only way for tax offices to check the contents of tax returns. Therefore, there are systems prepared to correct filing errors by various methods. However, the basic idea is that the declaration of the person concerned should be considered to be correct and temporarily accepted as it is.

Therefore, a sense of fairness in the tax system is essential for the country as a whole to ensure appropriate tax payments while reducing the cost of correcting errors in tax returns. This is because it is expected that many rule violators will appear under rules where you can’t have a sense of fairness.

In other words, if the tax system and tax administration fail to respond to changes in society, and this undermines a sense of fairness, the tax system may collapse. Therefore, taxation rules and judgment criteria must always be checked.

Also, from the taxpayer’s point of view, it is understandable that the smaller the amount of tax paid, the better. But, as mentioned at the beginning, taxes are a little different from regular shopping costs. It’s like a membership fee for living in Japanese society, and when deciding the amount, the idea of a burden commensurate with the tax-bearing capacity is adopted in order to maintain a sense of fairness among the people.

From November 11th, “Think About Tax” Week will start. Why don’t you take this opportunity to reflect on the original idea of tax?

* The information contained herein is current as of October 2021.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.

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