1. Governance
June 10, 2019updated 15 Jul 2021 4:41pm

Could copying Japan’s hometown tax fix Britain’s geographical inequality?

The regional divides across the British economy are now a major problem, and how policy can improve economic growth in poorer cities and redistribute across the country is a big political question. But Britain is not the only nation facing this.

Although governments in Japan and the UK face many distinct challenges, urban economics explains the changes that cities in both countries are experiencing. The reorientation of economic activity towards high-skilled exporting work has increased the economic importance of large cities, and left others with disadvantaged industrial bases and labour markets. Ideas from abroad give us some idea how to respond to these large, structural issues in cities, even if the political and environmental contexts differ.

For instance, in 2008 Japan introduced a hometown tax credit, or furusato nouzei, where residents receive a discount on their local tax bill if they decide to transfer a portion of it to a hometown of their choice. The idea is that in Japan’s devolved tax system, local government in less prosperous parts of the country has greater needs but fewer financial resources than cities with strong economies and lots of workers. The hometown tax tries to encourage workers in Tokyo to transfer some of their taxes to the local authority that gave them the skills to work in the capital, and ¥64.5bn (£450m) was transferred out of Tokyo this way last year.

Japan’s hometown tax has been used to direct revenues to local governments hit by the Great East Japan Earthquake such as Onagawa. But it has also established a curious market where municipalities offer goodies to taxpayers as they compete for Tokyoites’ hometown tax allocation. Websites have been set up to showcase which hometowns offer the best delicacies to picky hometown tax payers, including rice, fruit, and sake.

The Japanese Government is as a result cracking down on this abuse of the hometown tax, but it will be retained. It remains to be seen how the policy will function after these reforms, after attempts by government to impose a voluntary cap of 30 per cent cap on the value of gifts handed out stuttered, but it is a novel approach to addressing regional inequality in living standards and local government funding.

If the Japanese Government’s reform efforts are successful, this would be an idea worth considering in the UK. Poorer parts of the country providing children with the skills to enter high-paid work often see their young people move away to the cities with that high-paid work – myself included. A hometown tax could allow people in prosperous cities to directly give back to the places where they were raised.

But local government funding and finance in the UK would probably need to change before we could introduce a hometown tax in the UK. While local taxation in Japan is based upon asset, consumption, and income strands, in the UK we just have two local property taxes – council taxes and retained business rates, which is probably not a broad enough tax base to launch a hometown tax.

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Policies from other countries like the hometown tax are relevant to politicians and civil servants in the UK as they grapple with the same problems in economic geography. Policymakers in local government and Whitehall should follow Japan’s efforts to reform the hometown tax closely, and if it is successful, consider this approach to help struggling places benefit from the prosperity of more successful ones.

This article originally appeared on the Centre for Cities’ blog.

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