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Tuesday, June 28, 2011

Prospects for dissaving in Japan and inheritance tax

In the book "Dogs and Demons: Tales from the Dark Side of Japan", Alex Kerr notes that Japan has very high inheritance taxes relative to other developed countries. This could be a significant factor in Japan's public and private economic future, as larger numbers of Japanese pass away leaving substantial savings from their estates.

BusinessWeek identified the issue back in 1999 in an essay "Commentary: Inheritance Taxes Are Draining Japan's Lifeblood", providing examples of how this is a problem. The essay explains that:

"Many small and midsize companies cannot afford to expand and keep up with tax payments at the same time. Yet many cannot sell assets, since potential buyers are also scarce. And as Japan's population ages, more entrepreneurs are frustrated at their inability to hand their businesses over to their children without also sentencing them to lifetimes of tax payments."


and yet
"the government relies on inheritance taxes for $18 billion annually, or 4% of its budget, which runs a large deficit".

More recently (April 2011), researchers pointed out that the inheritance tax is still an issue:

"With its rapidly aging society, nowhere is inheritance tax more important than in Japan. Over the past decade, an unexpected segment of Japan’s population has been impacted. Although originally aimed at the wealthy, inheritance tax now impacts regular Japanese salary men and retirees who own land and whose other assets’ value has nominally increased over the years. The inheritance tax bill often comes as a shock to the heirs. As a result, any change to Japan’s inheritance tax regime is important not only to the wealthy, but also to the average Japanese homeowner."
Apparently reforms are being discussed in Japan's legislative body that would:

"promote the transfer of trillions of yen from the nation’s conservative, money-conscious elderly to the free-spending younger generation.

Beginning in April 2011, a reduction in the inheritance tax exemption will be effectively coupled with a change in the gift tax regime. The policy change would see a significant rise in inheritance tax, as well as a reduction of gift tax by almost half. This makes it attractive to give money away now, instead of waiting and having a future inheritance taxed at higher rates. The essence of the tax reform is encouraging elderly Japanese to gift their assets now instead of waiting to bequeath it in a will. As an economic stimulus measure, the success of this plan hinges on a hope that the younger generation will open their wallets and spend more freely than their savings-conscious parents or grandparents."

This is dis-saving as a policy tool. It is an open question whether reforms will take place and if so whether the impact will be significant to Japan's overall economy.