Bridging the Urban/Rural Divide through healthy competition

Today’s Note dives into the realm of economic and tax policy. Sounds dry and boring, right?

Actually not, I wager. Japan’s Hometown Tax system (also known as Furusato Tax) is a novel approach by the Japanese Government to alleviate the rural/urban divide by allowing taxpayers to allocate a portion of their tax payments to the rural municipality(s) of their choice and receiving some free local goods in exchange.

Win-win for the taxpayer, rural municipalities and the people of Japan, right? Pretty much yes. However,like all systems and policies; things aren’t completely black and white (remember, most things are grey!), but in general this is a very interesting and impactful way of providing depopulated rural communities an innovative way to raise crucial tax revenues.

It is also a unique blend of competition-inducing policy and redistribution. I’m not an economist or public policy expert, but I don’t think you see those two concepts working together that often.

How Hometown Tax Works

It’s quite simple. Every income tax payer in Japan (foreigners like myself included) has the option of “donating” up to 30% of their Inhabitants Tax (i.e. city and state tax; which is 10% of your total income) owed to any municipality(s) other than their own. You will receive the full amount (minus a $20 admin fee) back via tax credits. The municipality that receives your donation then sends you a gift in return to show its gratitude, usually worth about 30% of your donation. The municipality enlists local companies to produce and send out the gifts. These gifts need to have a strong connection to the municipality and range from local produce, wagyu steaks, alcohol, cameras made at the local factory to coupons for hotels in the jurisdiction.

Let’s use someone making $100K a year as an example:*For ease of understanding and sake of simplicity, I am converting all figures into USD at an exchange rate of 100yen=1 dollar

• You owe 10% of that in local Inhabitants Tax - $10K

• You can donate up to 30% of that under the Hometown Tax system - $3K

• You receive about $900 worth of cool local goods & services and feel good about doing your part to help rural communities

Making the donation is as easy as buying something on an e-commerce site. In fact, most of Japan’s key players (Rakuten and Yahoo Shopping) have dedicated sections and there are a number of specialty sites (Satofuru, Furusato Choice). Choose your favourite local grapes, sake or hotel voucher from an island down south, proceed to check-out and pay, that’s it! On some sites you even get points. You get a receipt and depending on your income, all the deductions will be calculated for you automatically, or you just include them in your annual return. You also get to choose what type of program your donation shall be used on (eg. education, healthcare, economic revitalization, tourism promotion etc.)

For the individual taxpayer, this is awesome! You get a bunch of loot at no cost to you. For the municipalities, it’s also awesome as you get additional tax revenues and you get to support local businesses (who you enlist to actually produce and deliver the gifts). It’s obviously awesome for the local businesses as they get more sales and also exposure to affluent clientele.

For the urban cities, where the majority of the donations come from, it’s not so awesome as your donation is deducted from their tax coffers. This is the whole intention of the program however: redistributing taxes from big urban cities, which have been magnets pulling in youth born and educated in rural areas, to regions of Japan losing tax revenue due to depopulation.

That’s all great, but does this actually make a difference?

The Hometown Tax System has been around for 12 years and has seen enthusiastic uptake and growth. Like everything, it is no ultimate silver bullet, but it sure seems to be having some meaningful impact and has promise to do a lot more.

Firstly the raw numbers from the most recently available stats for 2019 (source: Japanese Government):

• $4.9B donated to municipalities

• 4.06M donors from an eligible base of 51M

• 74% of donations are coming from Japan’s four major urban clusters

• 76% of donations are going to regions outside of Japan’s four major urban clusters

• 47% of received donations are used to procure/send the gifts and manage the program

Japan’s GDP is $4.7 trillion, so this seems like a drop in the bucket (about 0.1%), which I admit it is. When you adjust to the urban/rural ratio that figure goes up to about 0.2%, which is still small, but it certainly isn’t something to ignore, especially when the majority of these monies are going to rural areas that are starved of revenues due to depopulation.

Perhaps most interesting is the impact seen on the ground with each individual city and company supporting the program. A few studies show some very promising insights.

Kobe University Prof. Takaaki Hoda provides some encouraging points in a study on the effects of Hometown Tax. He looks at one small town in central Hokkaido, Kamishihoro which has a population of about 5000. In 2014 the town raised about $10M in donations. The estimated economic spillover from this was $12.2M with a boost to the local GDP of $6.6M and creation of 82 jobs. It also generated $180K in inbound tourism by donors from around Japan. For a town of 5000, this is substantial to say the least. Looking at the impact it has on individual companies and things are even more heartening. Below are photos from the town government’s celebratory tweet of the opening of a new processing plant for Local beef producer Niku Factory, where they commented on how this will allow the town to deliver more yummy steaks around Japan.

It’s all about competition

Prof Hoda touches on another crucial point - Hometown Tax and how it spurs competitiveness, which is a big departure from the typical baramaki (scattergun) approach of regional aid. Instead of equally dividing a predetermined amount to every municipality out there, regardless of their capability in using the funds smartly, Hometown Tax puts the process of allocation into the hands of taxpayers and the individual municipalities and the companies providing the gifts. Some may call this unfair and too capitalist for a public policy aimed at rural revitalization, but I trust most of the readers will recognize that healthy competition is a core element in the long term stability of most things in the world.

Hometown Tax is driving competitiveness not just between municipalities, but also for the individual companies supporting the system. Prof Hoda cites an interview with the city of Hirado in Nagasaki. Of course Hometown Tax has spurred job creation as well as ignited new investments, but it has also made large contributions to improving the quality of the city’s goods.

The majority of donations come from the wealthy large metro areas of Japan, from donors with high incomes, and high standards. This has incentivized the producers to invest in quality improvements, packaging and promotion, raising the overall value of the goods & services they produce. This not only helps attract more donations, it makes them much more competitive in the standard marketplace.

The City of Hirado is one example, but this effect is happening across the board. A 2018 study done by a University in conjunction with a Hometown Tax portal site shows the ripple effects of the system:

• 25% of donors end up going on to purchase more goods produced in the municipality via standard marketplace

• 37% of local companies providing the gifts to the donors saw an increase in normal sales, with 12.4% seeing substantial (10%>) increases

• 37% of donors end up visiting the municipality as a result of the connection they made from the donation and gift receiving

A system worth expanding in Japan and being adopted by other countries

This Note has just scratched the surface of Hometown Tax and its impact on Japan’s rural economy, showing a few high level stats and qualitative anecdotes. Like any policy, there are undoubtedly tradeoffs and unintended consequences, which we did not unpack for sake of brevity. Saying all that however, I trust that most will agree that this program is generating positive benefits. Japan should look at ways to further tune it as well as encourage higher utilization of it (as noted above, less than 10% of eligible taxpayers are taking advantage of getting a bunch of free loot!).

More importantly, and the whole reason why I wrote this Note, other countries should take a good look at Japan’s Hometown Tax system and consider implementing something similar. Good policy is hard to find these days, but this one seems to be a diamond in the rough, hopefully not so rare for much longer.

Donate on!

Quarantine Update: my sprouts are slowly but surely making progress. Hopefully our next Note will show them with some leafage ;)