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Designing the Refundable Tax Credit System for Japan
  • Policy Proposal

Designing the Refundable Tax Credit System for Japan

April 10, 2026

The Tokyo Foundation published a policy proposal, "Designing the Refundable Tax Credit System for Japan," on April 10, 2026.

Policy Proposal (Japanese only)

Japan has long lacked an adequate "second safety net" for low- and middle-income workers falling through the gaps between employment insurance (the first safety net) and public assistance (the third safety net). Non-regular employees, including those from the so-called employment ice age generation, have been left without sufficient support for years.

This proposal addresses that structural gap and outlines a concrete, two-stage blueprint for introducing a refundable tax credit in Japan—one that simultaneously promotes employment and advances income redistribution.

The United States has long used a combination of tax credits and direct payments to support low-income workers, successfully strengthening work incentives while simultaneously reducing inequality. Building on these international precedents, this proposal adapts their lessons to Japan's institutional context through the following six recommendations.

"Designing the Refundable Tax Credit System for Japan": Six Recommendations

Recommendation 1:  Target individual workers

Recommendation 2:  Phase out benefits gradually to eliminate income cliffs

Recommendation 3:  Deliver benefits through the government-designated bank account system (Kōkin Uketori Kōza)

Recommendation 4:  Leverage municipal income data (Phase 1) and develop a Government Data Hub [provisional name] (Phase 2)

Recommendation 5:  Designate the national government as the administering body

Recommendation 6:  Fund the program through income tax reforms—including a review of the temporary basic deduction supplement, the conversion of personal deductions to tax credits, and a reduction in the employment income deduction—alongside social security reform, followed by a broader discussion of “Integrated Tax and Social Security Reform 2.0”

The Tokyo Foundation has identified the transition to a sustainable social system amid population decline as one of its core research themes and has been conducting research on tax and social security reform.

This proposal is the result of a collaborative effort by four researchers: Shigeki Morinobu (Senior Policy Research Officer), Motohiro Sato (Senior Fellow and Professor, Hitotsubashi University), Takero Doi (Senior Fellow and Professor, Keio University) and Kazumasa Oguro (Senior Fellow and Professor, Hosei University).

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