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Yoichiro Kagawa, Yomiuri Shimbun Staff Writer, Yomiuri

Many company employees will have been surprised to see a sharp increase in the amount of tax deducted at source from their paychecks in June.

The increase was due to a rise in resident taxes paid to prefectural and municipal governments as a result of a transfer at some tax sources from the national government to local governments.

Though an equivalent to the increase was reduced from the amount of income tax that went to the state coffers in January, opposition parties used the rise to attack the government as it occurred just before next month's House of Councillors election.

The administration of Prime Minister Shinzo Abe and the ruling parties, who are worried about falling approval ratings caused primarily by problems related to sloppy management of public pension data, urged the public to view the rise as a result of the transfer, and not as a tax hike.

During his speech in Matsuyama on June 18, Democratic Party of Japan Secretary General Yukio Hatoyama said: "I want you to carefully check your wage slips this month. Local resident taxes will have jumped."
 
Opposition parties have insisted the June hike victimizes ordinary citizens, hoping to win support from company employees and pensioners.

The DPJ has published an online comic on its Web site insisting the rise was a huge-scale tax hike.
One of the Japanese Communist Party's pledges for the upper house election is to stop "large-scale rises in local taxes."

The transfer of tax revenue sources from the central government to local governments is part of a trio of reforms aimed at decentralizing power.

This month's rise is due to effects related to the transfer that appeared in national income tax from January, and in local resident tax from June.

Except for some high-income earners, national income tax has fallen since January, with equivalent amounts being added to local resident taxes starting in June.

In a move unrelated to the change, all fixed-rate tax deductions--first implemented in 1999--were terminated in June. The measures had cut income tax by 20 percent and local income tax by 15 percent in an attempt to stimulate the economy.

Consequently, for many taxpayers, this month's rise is a double blow.

According to an estimate by the Internal Affairs and Communications Ministry, a household comprising a company employee with an annual income of 5 million yen, a nonworking wife and two children will have seen a 2,250 yen fall in income tax in January, and a 5,400 yen rise in local resident tax from June.

Of this 3,150 yen difference, 960 yen was due to the abolition of the fixed-rate tax deduction. But even after excluding this amount, the local resident tax hike is still 2,190 yen more than the drop in national income tax.

This is because local resident taxes are not deducted from company employees' seasonal bonuses, and thus more is deducted from workers' monthly salaries than was the case with national income tax.

Due to this method of tax collection, June's hike could be perceived as being a heavier burden than it is in reality.
The government and ruling parties are increasingly worried by the opposition parties' campaigns that claim the rise was a tax hike.
 
Though the transfer of tax revenue sources and the end of fixed-rate tax deductions had already been decided by the administration of former Prime Minister Junichiro Koizumi, "the timing could not have been worse," coming just before the upper house election, a senior government official said.

As approval ratings for Abe's Cabinet have been falling, mainly due to the pension problems, a Liberal Democratic Party member in the upper house voiced his concern, saying, "[This] may drive the approval ratings down even further."

Speaking on the local tax rise, Abe stressed, "It was the result of a fall in income tax after the transfer of tax revenue sources."

On the termination of the fixed-rate tax deduction, the prime minister tried hard to fend off criticism by saying the tax cut "was introduced as an emergency measure to stimulate the economy."

Since the start of the year, the government and ruling parties have used newspaper advertisements and government-sponsored TV programs to underline that the transfer is not a tax hike. The ads were carried also in personal computing publications and fashion magazines to reach a wide audience.

The rise in local taxes has prompted numerous enquires by taxpayers at local government offices across the nation. Some have asked whether calculation errors have been made.

Some local governments have reported receiving hundreds of such inquiries in a single day, often from pensioners.

Pensioners also are affected by the transfer of tax revenue sources. However, their income tax is deducted from their pensions in February, April, June, August, October and December, to coincide with payouts. As a result, pensioners' income tax payments have fallen since February.

Pensioners pay local resident tax four times a year--in June, August, October and the following January--based on tax payment notices in June from their respective local governments.

Although they make fewer payments, single payments are larger. This has left many pensioners feeling puzzled.

According to the ministry's estimate, in the case of a pensioner couple with a combined pension income of 3,292,000 yen--2.5 million yen for the husband and 792,000 yen for the wife--income tax fell 3,200 yen to 4,100 yen as of February.

From June, however, the couple's local resident tax doubled to 11,600 yen compared with the previous year. After factoring in the termination of the fixed-rate tax deduction, they will be paying an extra 6,200 yen a year.
People whose income sharply fell this year--such as those who retired or changed jobs--also need to carefully check their tax figures.

Because local resident tax is calculated based on income generated the previous year, an individual's local resident tax can rise, even if his or her income has fallen this year. However, national income tax is calculated based on this year's income.

If a person's income falls, the rise in the total tax burden negates any benefit from lower taxation rates.

To provide relief for such people, a transitional measure will apply pre-transfer rates when calculating an individual's local resident tax for this year.
 
Such people initially will have to pay the full amount based on this year's local resident tax--calculated with the new rate--but can claim a refund from the local government in July 2008.