Global COE Hi-Stat Discussion Paper Series 201

Research Unit for Statisticaland Empirical Analysis in Social Sciences (Hi-Stat)

Strategic Interaction between Inter Vivos Gifts andHousing Acquisition

Hi-Stat Discussion Paper

Norifumi Yukutake
Shinichiro Iwata
Takako Idee

August 2011

Hi-Stat
Institute of Economic Research
Hitotsubashi University
2-1 Naka, Kunitatchi Tokyo, 186-8601 Japan
http://gcoe.ier.hit-u.ac.jp

Strategic interaction between inter vivos gifts andhousing acquisition
Norifumi Yukutake
Housing Research and Advancement Foundation of Japan&
Institute of Economic Research, Hitotsubashi University

Shinichiro Iwata
Faculty of Economics, University of Toyama

Takako Idee
Faculty of Economics, Seikei University

July 2011

Abstract
To consider the policy event of a gift tax reduction earmarked for housing acquisition,
the interdependence of parental gifts and children’s housing investments is modeled, considering an informal care issue behind such decision making. The empirical results, which
use a sample of households who purchased a house in Japan, demonstrate that such a tax
cut would appear to have the following limited e¤ects on boosting housing investment inequilibrium. First, even though transfers are encouraged, they consequently reduce housing
investment because the housing investment function is negatively related to gifts. Second,
increments in housing investment are further discouraged because the slopes of the gift andhousing investment functions have opposite signs.

JEL classi…cation: D11, D12, H14, J14, R21
Key words: Intergenerational transfer, housing investment, gift tax

Corresponding author. Email address: iwata@eco.u-toyama.ac.jp (S. Iwata).

1

1

Introduction

To stimulate domestic demand, the Japanese government introduced a special gift tax abatement when children receive a gift of money from their parents for acquisition of a residence.
As questioned by the government and the housing industry, does this policy really facilitate
parental transfers and promote housing investments? To address this issue, we o¤er a theoretical model and empirical results of the strategic interaction between inter-vivos gifts andhousing investments.
Previous studies have suggested that gifts by parents to their adult children tend to assist
home acquisition in many countries (Engelhardt and Mayer, 1994; Guiso and Jappelli, 2002;
Spilerman and Elmelech, 2003; Cox and Stark, 2005; Du¤y and Roche, 2007; Helderman
and Mulder, 2007; Cirman, 2008; Luea, 2008).1 Because a conventional mortgage requires
a down payment of 5–20% (Engelhardt and Mayer, 1998), home-buying households have tobuild substantial savings, and thus down payment constraints may distort optimal housing
consumption (Artle and Varaiya, 1978). Intergenerational transfers are likely to relax thisborrowing constraint. Engelhardt and Mayer (1998), Guiso and Jappelli (2002), and Du¤y andRoche (2007) estimated that transfer recipients can reduce savings, increase down payments,
and purchase higher-priced dwellings. Luea (2008) also demonstrated that receiving gifts
appears to have a positive impact on the housing demand of children.
Although substantial inter vivos gifts are frequently earmarked toward acquiring a dwelling,
there are few papers that investigate the motives behind transfer decisions. Cirman (2008)
demonstrated that intergenerational transfers for acquiring a residential property increase
when both housing prices and interest rates are relatively high. She concluded that transfers can act as an informal source of housing …nance and play a cushioning role in terms of
1

In the US, Engelhardt and Mayer (1994) found that a …fth of all …rst-time home-buying households receive a…nancial transfer from their relatives. Similar to the share in the US, in the Netherlands, Helderman and Mulder(2007) found that approximately 20% of children receive a parental gift to purchase a home. In Slovenia, Cirman(2008) demonstrated that a quarter of homeowners receive a …nancial transfer from their family. In Ireland,Du¤y and Roche (2007) found that evidence on parental assistance in the Irish housing market has been mixed,
namely from 15% to 33% of …rst-time home buyers receive transfers. In Italy, one country where family bonds
are especially strong (Hank, 2007), Guiso and Jappelli (2002) showed that one-third of homeowners receive
transfers earmarked for a home purchase. In Israel, Spilerman and Elmelech (2003) produced evidence that 36%
of parents stated that they have a high parental responsibility of assisting their children’s homeownership.

2

harsh market conditions. This suggests that parents have an altruistic preference, i.e., parents
care about the well-being of their children, and therefore parents help their children when they
are confronted with a deterioration in housing-related conditions. The motive behind transfer
decisions, however, is a controversial issue. Many studies in relation to intergenerational transfers or bequests have suggested parents are more likely to possess an exchange motive rather
than an altruistic motive (Bernheim, Shleifer, and Summers, 1985; Cox, 1987; Horioka, 2002;
Tomassini, Wolf, and Rosina, 2003; Yamada, 2006; Angelini, 2007; Kureishi and Wakabayashi,
2009; Yin, 2010). That is, parents tend to enter an agreement with their children whereby
their adult children agree to provide a service in exchange for receiving gifts. Tomassini, Wolf,
and Rosina (2003), Yamada (2006), and Yin (2010), for example, demonstrated that transfers
are made when children choose to locate their home close to their parents’home, because one’s
adult children nearby may facilitate more regular contact with the children.2
The remainder of this paper consists of three parts. The …rst part o¤ers a theoreticalmodel. As Du¤y and Roche (2007) mentioned, existing studies related to intergenerationaltransfers targeted toward home purchases have mainly focused on empirical issues. In thispaper, we develop a model of strategic interaction between two-generation families: children
and parents. This model extends the theoretical model of Cox (1987), which captures boththe altruism and the exchange motives. The theoretical model in this paper di¤ers from thatof Cox (1987) as follows. In the model of Cox (1987), services provided by children to parents
are endogenous, while in our model, services are given and completely controlled by parental
gifts. That is, services are assumed to be an increasing function of gifts. This may re‡ect
the previous empirical results that gifts are provided by parents for an exchange motive.3
Instead, we consider housing investment decisions by children, because our paper focuses on
housing decision issues. Moreover, Cox (1987) did not consider the interdependence of players’
2

Alternatively, transfers earmarked for homeownership are made because housing is complementary to thebirth of grandchildren (Cox and Stark, 2005). Wol¤ (2001), Johar, Maruyama, and Nakamura (2010), andYamada (2006), however, found evidence against the demonstration-e¤ect hypotheses.
3
In Japan, the Japanese Civil Law may be justi…ed by this assumption. According to the Civil Law, a
successor who has made substantial contributions to the maintenance or increase in the value of the predecessor’s
estate through medical treatment or nursing of the predecessor, or other means, is entitled to receive a gift ofgreater value than his/her legal portion of an inheritance. This is called a contributory portion.

3

decisions, while we consider it in this paper. That is, we assume that the behavior of a twogeneration family can be described by a Nash equilibrium, and, consequently, gifts provided
by the parent depend on housing investment spent by the child, whereas housing investment
depends on gifts. Under the pure altruistic motive, the housing investment function is positively
related to gifts, as suggested by Engelhardt and Mayer (1998), Guiso and Jappelli (2002), andDu¤y and Roche (2007). This implies that an increase in parental gifts has only an incomee¤ect on housing investment. The situation, however, becomes more complex if parents possess
an exchange motive. That is, the e¤ect of gifts on housing investment becomes either positiveor negative.
The second part of this paper undertakes empirical analysis. We test for strategic interaction between inter vivos gifts and housing investment. Therefore, unlike previous studies,
which have examined decisions related to gifts and housing investment in isolation, we estimate
both the gift and the housing investment functions. A fundamental problem in estimating thesereaction functions is the endogeneity of key covariates: the reaction function of parents’choice
to children’s decisions, and vice versa. The two-stage procedure, where the …rst stage involves
estimating regressors for both gifts and housing investment, is used to overcome this problem(Nelson and Olsen, 1978).
The third part considers policy implications. We focus theoretically and empirically on
how an exogenous policy event of the gift tax reduction alters parents’and children’s decisions.
Although studies concerning the e¤ect of the gift tax on the residential housing market havebeen quite limited, Bellettini and Taddei (2009) and Smolders (2010) considered this issue.4
Smolders (2010) found that the 2003 Flemish gift tax reduction signi…cantly increased the
supply of new housing starts. Bellettini and Taddei (2009) developed a theoretical modelfeaturing intergenerational altruism. The model suggests that a reduction in the gift tax
reallocates agents’housing stock away from the market and toward donation, and consequently
it increases the market price of real estate. Their theoretical results are supported by anempirical model, which used the 2001 abolition of bequest and donation taxation in Italy
4

A number of previous studies of gift taxes and transfers have focused on the tax minimization problem ofdonors (Joulfaian, 2004, 2005; Nordblom and Ohlsson, 2006).

4

as a case study. In contrast with Bellettini and Taddei (2009) and Smolders (2010) who
used city (community)-level aggregate data, we use Japanese individual micro data. Japaneseevidence may provide an interesting setting as well, because it includes a time period when
the government has reduced gift tax rates earmarked for housing acquisition. Moreover, theindividual micro data may have merit in that it can consider tax di¤erences between individuals.
However, an e¤ective gift tax rate, which is used in both reaction functions, has a potential
endogeneity problem. In the …rst stage of estimation, we also consider this endogenous issue by
estimating generated regressors. Therefore, three generated regressors, namely gifts, housing
investment, and e¤ective gift tax rates, are used to estimate inter vivos gifts and housing
investment.
The remainder of the paper is organized as follows. Section 2 provides a brief descriptionof the Japanese gift tax. In Section 3, we present a theoretical model of gifts provided byparents and housing investment made by children. The data and empirical model used are
discussed in Section 4, along with the empirical results. Section 5 theoretically and empiricallydemonstrates the exogenous event of a gift tax reduction on housing investment. Section 6o¤ers some suggestions for future research. Finally, Section 7 summarizes the main conclusions.

2

Gift tax in Japan

We will brie‡y review the background of the Japanese gift tax and its reform.5 Japanese gift
tax is payable by the person who receives the gift. In the estimation stage, the data from2001 to 2008 are used. At that time, three di¤erent schedules of e¤ective gift tax rates(j = 1; 2; 3) existed. The detailed methods for calculating
A3 in the Appendix. The regular e¤ective tax ratejj are shown in Tables A1, A2 and

1 follows a progressive schedule to produce

the solid line in Figure 1.
However, since the 1984 Japanese tax reform, there has been a special gift tax abatement for
persons who receive transfers from their parents or grandparents for the purpose of acquiringa residence. At that time, it was widely believed that Japanese dwellings are substantially5

For more detail about the Japanese gift tax, see Darcy (2007).

5

inferior in quality compared with other developed countries. For example, the 1986 Annual
Economic Report issued by the Economic Planning Agency showed that the ratio of nominal
housing equity to national income was 1.40 in the UK and 1.04 in the US, while it is only
0.65 in Japan.6 Therefore, this tax policy was aimed at increasing the number of high-quality
dwellings. If the special gift tax abatement applies, the special e¤ective tax rate

2 follows a

progressive schedule shown as a broken line in Figure 1. To receive this abatement, however,
the gift must be used to purchase a residence located in Japan. Moreover, donees whose
total taxable income for the year is in excess of 12 million yen (14.31 million yen for salaried
employees) cannot enjoy the abatement. In addition, the donee must sell a exsisting dwelling,when he/she purchases a new dwelling.
The Japanese government has further reduced the special tax rate of gifts since 2003, aspart of a general …scal stimulus package. In Japan, the majority of …nancial assets are heldby senior citizens. The government has thus attempted to facilitate the transfer of assets fromseniors to their children, because this may stimulate the purchase of housing by the younger
generation.7 The 2003 Japanese tax reform decreased the special e¤ective tax rate
as a dotted line in Figure 1. Although

3 , shown

3 only applies to gifts from a parent to a child topurchase a residence, it applies regardless of income and previous homeownership.

3

The model

The analysis in this section focuses on the behavior of a two-generation family. There are twoplayers in the model: a donor, say the parent, and a recipient, the child. The parent decides
how much to give in terms of nonnegative inter vivos gifts g to the child. As mentioned in
Section 1, one of the reasons that gifts are provided by the parent is the exchange motive: thechild devotes services s, e.g., nursing care, in exchange for g. However, the level of services
provided by the child cannot be observed from our data. To avoid this problem, assume that
6

Kanemoto (1997), however, demonstrated that the condition of owner-occupied housing in Japan is not badcompared with the US and European countries, using other statistics such as housing prices, ‡oor space, theshare of housing expenditure in total national expenditure, and so on.
7
In December 2010 , the Japan Tax Commission announced their proposed 2011 tax reform. It calls for an
increase in the inheritance tax, and suggests a decrease in the gift tax for some taxpayers to promote transfersof assets to younger generations.

6the services are a nondecreasing linear function of g. Then s = s(g), where s(0) = 0, sg

0,and sgg = 0.8 This implies that the parent and the child make a one-to-one relation contract
between g and s. These settings allow us to derive a testable hypothesis about players’behavior
that can be tested using the data. On the other hand, the child decides how much to spendon (positive) housing investment h. The gift tax is payable by the child.
We adopt a strategic-interaction model: the parent decides the value of the gift given thelevel of housing investment made by the child, and vice versa.
Assume that the utility function of the child depends on housing investment h, services tothe parent s, and the composite good x. Because all observations in the data have positive
housing investment, h is assumed to be positive. To keep the model tractable, the utility
function of the child, U C , is assumed to be separable as follows:
U C = uC (h; s) + v C (x):Both the subutility functions, uC ( ) and v C ( ), are assumed to increase at a decreasing
CC
C
rate: uCh > 0, uhh < 0, vx > 0, and vxx < 0. We assume that the child derives disutility fromC
nursing services at an increasing rate, namely, uC
s < 0 and uss < 0. The former assumption,uC
s < 0, corresponds to the assumption of Cox (1987). In his model, the child provides some
services to the parent, and the child derives disutility from them. Similar to Cox (1987), we
9
assume that uC
hs < 0. The negative sign implies that increases in services decreases the child’s
8

In the theoretical model of Cox (1987), a child’s welfare is represented by the utility function U C (x; s),CCwhere x is the child’s consumption, UxC > 0, Uxx< 0, UsC < 0, and Usx< 0. The child’s income constraint isCCgiven by y + g = x, where y is the child’s income. In the exchange motive case, to induce a child’s services,parents suggest the following participant constraint to their children:
U C (y C + g; s) = U C (y C ; 0):
Let us consider how the child reacts when the parent increases the gift. Di¤erentiating the above equation withrespect to s and g, we have:
@s
UxC
=
> 0:
@g
UsC
This is consistent with our assumption sg > 0. We also obtain:
@2s
=
@g 2

C
C
Uxx
UsC Usx
UxC
< 0:
2
C)
(Usx

On the other hand, we assume sgg = 0, because this assumption always ensures the second-order condition ofa maximum in our model.
9
Cox (1987) assumed a negative mixed partial derivative of utility with respect to the child’s consumption

7

marginal utility of housing. This phenomenon is more likely to occur when informal care tends
10
to be a heavy burden for children, namely uC
s < 0.

Let yC be the income of the child, t be the gift tax rate, p be the price of the composite good,and l0 be the value of the child’s land endowment (a lot with no buildings on it). Although
the actual burden of gift tax rates ( ) partially depends on the value of the gift, as shown in
Figure 1, we only consider t because this simpli…cation does not alter the theoretical results.
We consider the endogeneity of gift tax rates in the empirical section. Let us suppose that thechild can deduct l0 from the construction expenses of the dwelling. Then the budget constraintof the child becomes:
yC + g(1t) + l0 = h + px:

When the child receives a positive amount of the gift, then the child will have to pay the gift
tax and therefore the after-tax receipt becomes 1

t.11

From this constrained utility maximization problem, the reaction function of housing investment is de…ned by:
h = h(g; t; yC ; p; l0 );

(1)

@h
@h
@h
@h
@h
? 0;
< 0;
> 0;
? 0;
> 0:
@g
@t
@yC
@p
@l0

(2)

where

Increasing the gift tax rate reduces the availability of gifts, and consequently decreases
housing investment (@h=@t). The income e¤ect (@h=@yC ) is positive. While, the price e¤ect(@h=@p), which implies housing prices are lowered relatively, is undetermined because it depends on the negative substitution e¤ect and the positive income e¤ect. Similar to the incomee¤ect, land endowment has a positive impact on housing investment.12
and the child’s service.
10
Consider uC = h (A s ), where parametersand must satisfy 0 < < 1 and > 1, respectively.
Parameter A is the constant term, where A > s . Then uC
h 1 s 1 < 0. The marginal ratehs =of substitution (MRS) between housing and nursing care services becomes positive (as nursing care services
increase more and more, an increasingly higher amount of housing investments is required in order to maintainthe same level of utility) when the utility function satis…es these assumptions. The positive MRS can benatural, because we assume that the child must increase nursing care services in exchange for receiving gifts,
and providing nursing care services generates disutility for the child.
11
The inter vivos gift is only intended for a housing acquisition in the data used in the empirical section. The
following theoretical results do not depend on this if we only consider an inner solution.
12
Appendix A shows how Eqs. (2) are calculated.

8

The sign of @h=@g a¤ects the slope of the reaction function of housing investment withrespect to a given amount of an inter vivos gift. The gift increases the housing investment of
the child through the budget constraint: an increase in g has a similar impact to an increase
in income. We call this the …rst channel. Engelhardt and Mayer (1998), Guiso and Jappelli(2002), Du¤y and Roche (2007), and Luea (2008) examined the …rst channel, although theireconometric model assumed that the value of the gift was exogenous. The gift, however,decreases housing investment through the utility function: the mixed partial derivative, uC
hs isnegative. We call this the second channel. Because there are two opposite channels, the signof @h=@g is ambiguous and it becomes an empirical issue.
Next, let us consider the behavior of the parent. Similar to Cox (1987), we assume that theparent cares about both his/her own private utility and the child’s utility: V P = U P + U C ,where U P is the parent’s private utility. The parent thus cares about the child’s well-being. In
this sense, the parent is assumed to possess altruistic preferences. We, however, assume thatthe parent does not care about the child’s endowment (l0 ) when he/she considers the welfareof the child. Furthermore, the parent considers not the partial cost of the dwelling (l0 ) but the
total cost of the dwelling (h).
Assume that the parent’s private utility depends on services provided by the child, s.
The exchange motive can describe this assumption in our model, because we assumed thatthe services are a nondecreasing function of g. In addition, assume that the parent’s private
utility depends on care services purchased in the market, m. This is because there may be a
substitute relationship between care services supplied by the market and the child. Contrary
to the inheritance case (e.g., Bernheim, Shleifer, and Summers, 1985; Angelini, 2007), theexistence of market substitutes is important when we consider the inter vivos transfers. Thisis because, if there are no market substitutes, the bene…ciary can break the contract, andconsequently the benefactor cannot pose a threat. The existence of market substitutes is aunique point, which has been overlooked in existing studies. However, we drop the parent’s
consumption, to reduce the number of endogenous variables.13 We also suppose that the parent
13This simpli…cation does not alter the theoretical results, but alters an interpretation of it. See Appendix B.

9derives private utility from a housing investment spent by the child, h. Namely, the parent
considers the child’s investment as an own consumption good. For example, the parent canconsume housing services invested in by the child when the parent visits the child’s house.
Furthermore, the parent can enjoy it when the child o¤ers coresidence. Alternatively, theparent receives utility because homeownership of a large dwelling may proxy for the success ofthe child.
Because the income of the parent is not observed from the data, the private utility functionof the parent is assumed to be quasilinear: U P = uP (h; s) + m. Both housing and services
provided by the child are assumed to increase utility at a decreasing rate. Therefore, uPh > 0,uPhh < 0, uPs > 0, and uPss < 0. Similar to Cox (1987), we also assume that uPhs > 0. The
positive sign implies that the parent’s utility increases when the child dwells in a large houseand simultaneously provides a large amount of services. The parent may guess that the childis …lial to the parent in this case.
From the above assumptions, the parent’s utility function can be rewritten as:
V P = uP (h; s) + m + uC (h; s) + v C (x):The parent faces the following three constraints: nonnegative inter vivos gifts g

0 and

the two budget constraints:
yP = g + qm;
yC + g(1t) = h + px;

where yP is parent’s income, and q is the price of m.
Consider the case g > 0. Solving the constrained utility maximization problem, the giftfunction is then de…ned as:
g = g(h; t; yC ; p; q);

(3)

@g
@g
@g
@g
@g
? 0;
7 0;
< 0;
7 0;
> 0:
@h
@t
@yC
@p
@q

(4)

where14

14

Appendix B shows how Eqs. (4) are calculated.

10

The …rst sign, @g=@h, attempts to calculate the slope of the gift function with respect toa given level of housing investment. This depends on the sign of the mixed partial derivatives
uPsh and uC
hs , which are assumed to work in opposite directions.
The next three signs may re‡ect whether or not the parent possesses altruistic preferences.
The negative sign of the child’s income (@g=@yC ) suggests that the parent has a tendency tohelp the child when the child’s earnings are low. The price e¤ect (@g=@p) is ambiguous because
the substitution e¤ect and the income e¤ect work in opposite directions. These results may beconsistent with the empirical result of Cirman (2008). She mentioned that intergenerationaltransfers play a strong cushioning role in terms of grim market conditions. Interestingly, we…nd that the price e¤ect has a completely di¤erent impact on transfers and housing investment:
when @h=@p is positive, then @g=@p becomes negative, and vice versa. The e¤ect of the gifttax (@g=@t) is ambiguous as well. On the one hand, increases in t have the same power of
reducing the income of the child, and thus it increases g. On the other hand, increasing thegift tax relatively decreases the e¤ectiveness of the gift for the child; the parent thus reduces
the amount of gifts.
Finally, the partial derivative of q has the following two roles. First, it may re‡ect theparent’s exchange motive. This is because formal care (m) only appears in the parent’s utility,and formal care (m) and informal care (s) are assumed to be substitutes. The positive sign
implies that a rise in the market price of formal care services increases the amount of intervivos transfers. This result suggests that the parent must depend on attention provided by
the child when the market is limited. Then, the assumption of a contract to exchange a gift
for a service provided by the child may become a real possibility. Second, q can be used as an
instrument variable (IV) in the housing function, because it shifts the gift function while nota¤ecting the housing investment function.
The gift function can be identi…ed as well, because l0 only shifts the housing investment
function.

11

4

Empirical analysis

4.1

The empirical model

We must account for the fact that optimizing behavior leads to a corner solution response
for some signi…cant fraction of parents. To consider this problem, gi# is an unobserved latentvariable of a gift for household i. In addition, we may not use gift tax rates ti in the empiricalsection, because a two-generation family may actually consider the e¤ective gift tax ratesi.

Considering these points, we specify Eqs. (1) and (3) in the following linear form:hi =#C gi + C i + XCi C + "Ci ;

(5)

gi# =

#
P hi + P i + XP i P + ( "P i j gi > 0);(6)where hi is an observed housing investment, XF i is a vector of explanatory variables (F = P; C),F , andF , andF

are coe¢ cients. On the one hand, the vector XCi includes yi , pi , andinstrumental variable l0i . On the other hand, the vector XP i includes yi , pi , and instrumental
variable qi .
However, although gi# in Eq. (5) and hi in Eq. (6) are assumed to be exogenous for eachplayer, we only observe pairs of gi# and hi that are endogenously determined by the model. In
addition, the e¤ective gift tax rates

i are endogenous as well, because they generally dependon the size of the gifts, as shown in Figure 1. Before considering the endogeneity of thesevariables, the average gift tax rates that are given for parents and children are calculated. The
average gift tax rates are instruments for gi# , hi , andi . The details of these instruments are

discussed in the following section.
Two-step procedures developed by Nelson and Olson (1978) are used to examine endogeneity. In the …rst procedure, not only the reduced form of gi# and hi , but also

i are respectively

estimated, using the average gift tax rate. On the one hand, hi is estimated by ordinary leastsquares (OLS). On the other hand, gi# is estimated as a Tobit model, which takes into accountthe fact that gifts cannot have negative values. The e¤ective gift tax rate is estimated by the^ i , and ^i are
Tobit model as well. From the …rst step procedure, generated regressors g^i# , hobtained. In the second procedure, Eq. (5) is estimated by OLS, by replacing gi# and
12

i in

Eq. (5) with g^i# and ^i , while Eq. (6) is estimated as a Tobit model, by replacing hi andi^ i and ^i . From the two-stage procedure, consistent estimators are obtained,
in Eq. (6) with hbecause the endogeneity issues of the right-hand-side in both Eqs. (5) and (6) are considered.

4.2

The average gift tax rate

In the estimation stage, the data from 2001 to 2008 are used. During years 2001 to 2008, there
were three di¤erent schedules of e¤ective gift tax rates

j (j = 1; 2; 3); these were introducedin Section 2. In the estimation stage, we assume that children who receive a gift are subject
to the lowest tax schedules. That is, children who receive a gift before 2003 but who cannot
enjoy the special gift tax abatement pay

1 ; children who receive the gift before 2003 and who

can enjoy the special gift tax abatement pay
onwards pay

2 ; and children who receive the gift from 2003

3.

As mentioned, however, the problem is that the e¤ective tax rate depends on the size ofthe gift. In making the tax reduction an exogenous event, we follow Engelhardt and Mayer(1998) and Guiso and Jappelli (2002). In their model, a player considers the average price of
housing, which is controlled by cross-sectional and time variations when the player makes adecision. In our model, we examine the following two types of average gift tax rates. The …rst
type uses an average down payment, which is calculated as follows:P
0:20
hi;k;r;Di;k;r =
Nk;r
P
where
hi;k;r is the total value of housing investment in year k (years 2001 to 2008) in regionr, and Nk;r is the number of observations. Engelhardt and Mayer (1998) suggested that a
conventional mortgage requires a down payment of 5–20% in the US, and intergenerationaltransfers may relax the borrowing constraint of children. Following this, we assume thatboth parents and children consider the average down payment to calculate their own tax rate.
Households in Japan usually require a 20% down payment on the house price to obtain aloan. The average down payment thus corresponds to 20% (0.20) of the average house price.
Substituting Di;k;r into g in Table A1, we then calculate the …rst type of average gift tax rate.15
15

Although the assumption of 20% of the average house price seems reasonable, we also consider average gift

13

The second type uses the average value of gifts. The average value of a gift is calculated
as follows:
Gi;k;r =
where

P

P

gi;k;r;Nk;rgi;k;r is the total value of a gift. Substituting Gi;k;r into g in Table A1, we thencalculate the second type of average gift tax rate.
On the one hand, the e¤ective gift tax rate re‡ects the tax rate di¤erence between individuals. As mentioned, however, it involves an endogeneity issue. On the other hand, the averagegift tax rate cannot precisely measure the tax di¤erence between individuals, but it is exogenous for individuals. Considering this, we employ the average gift tax rate as an instrument
for the e¤ective gift tax rate. The average gift tax rate is expected to have an in‡uence on thee¤ective tax rate of each player, but may be uncorrelated with each player’s decision.

4.3

The data

The data come from the customer survey collected by the Japan Federation of Housing Organizations (JHO). The JHO is authorized by the Ministry of Land, Infrastructure and Transport. Its members consist of housing suppliers in Japan. Enterprises of various sizes are
members of the JHO, not only the large enterprises but also the medium and small enterprises. Various kinds of construction methodologies for housing suppliers are also included;e.g., prefabricated construction suppliers, wooden home suppliers, two-by-four home builders,and foreign-designed homes.16 The JHO distributes a questionnaire to home builders who solda detached house in the three major metropolitan areas of Tokyo, Nagoya, and Osaka, andfour provincial cities of Sapporo, Sendai, Hiroshima, and Fukuoka. The Tokyo metropolitan
area includes Saitama, Tokyo Metropolitan, Chiba, and Kanagawa prefectures; the Nagoya
metropolitan area includes Gifu, Aichi, and Mie prefectures; and the Osaka metropolitan area
includes Kyoto, Osaka, Hyogo, and Nara prefectures. Although the observations are limited tothe above areas, the number of newly owner-occupied houses accounts for approximately 46.6%
tax rates of 25%, 50%, 75%, and 100% of the average house price. We do not report the empirical results,
because the results are similar.
16
Details about the JHO are available at http://www.judanren.or.jp/english/index.html (accessed on 15
March, 2011).

14

of such houses in Japan (the 2008 Housing Starts, Ministry of Land, Infrastructure, Transport
and Tourism). Home builders do ask their customers to report transfers received, total earned
income of household members, and the price paid for property. The JHO conducts this survey
every year and collects micro-level cross-sectional data on approximately 3,000 home-buying
households. We use the data for 2001 to 2008. The number of observations in the full sample
is 3,131 in 2001; 3,000 in 2002; 3,047 in 2003; 2,794 in 2004; 3,634 in 2005; 3,540 in 2006;
3,241 in 2007; and 3,206 in 2008. Screening the data for complete information on the selectedvariables produces a sample of 23,939 observations, which are 93.5% of the full sample.
Table 1 presents the variable de…nitions for the endogenous, explanatory, and instrumental
variables. The notations in Table 1 correspond to the notations in the theoretical section.
Table 2 provides summary statistics. As in Table 2, gifts include zero values. Table 3 indicatesthat approximately 18.5% of observations receive a positive gift. On average, children’s income
without a gift is 1.51 million yen higher than for children with a gift. Although children witha gift receive approximately ten million yen on average, they invest 1.17 million yen less thanchildren without a gift.
Details of the gift tax rates were explained in the previous sections. The results in Table
2 suggest that Average tax 1 is most likely to ensure su¢ cient variation in the average gift
tax rate. This may re‡ect the fact that Average tax 1, which depends on the average down
payment, allows us to examine not only the average tax rate di¤erence between years (k), butalso the average tax rate di¤erence across regions (r).
For the child’s income we use the total annual income before tax earned by all members ofa child’s household. For the price of the composite good, we calculate the regional CPI datain each year by multiplying the nationwide CPI and the regional di¤erences in the index of
consumer prices, which are obtained from Statistics Bureau, Ministry of Internal A¤airs andCommunications.
From the theoretical model, the date of land acquisition which we use as an instrument
for the gift function is also included in XCi , while the market price of care services which weuse as an instrument for the housing investment function must be included in XP i . There15

are, however, the following three problems in obtaining the latter variable. First, we cannot
obtain the parents’ residential location from the data. We thus assume that children andparents reside in the same region. According to the 2004 wave of the Keio Household Panel
Survey, sponsored by the Ministry of Education, Culture, Sports, Science and Technology,
approximately 80 percent of senior parents and adult children dwell in the same prefecture in
Japan.17 Second, we must …nd market substitutes of informal care. In this paper, we consider
the long-term care (LTC) services provided by the market. Third, however, we cannot obtainthe market price of long-term care services. Instead, we use the capacity of LTC institutions
in each prefecture, which is obtained from Survey of Institutions and Establishments for Longterm Care (Ministry of Health, Labor and Welfare). The capacity may proxy the competitionin the care services market: an increase in the capacity decreases the market price of careservices. Thus, contrary to the expected sign of the market price, the expected sign of LTC
capacity becomes negative.
Four geographical categories are considered, comprising: Tokyo area (reference); Nagoya
area; Osaka area and provincial cities.

4.4

Estimation results of reaction functions

Table 4 demonstrates the estimation results, which use the …rst type of average gift tax (Aver^ i , and ^i are generated, we modify the covarianceage tax 1) in the …rst step.18 Because g^i# , hmatrix using 200 bootstrap replications.
First, let us examine the strategic interaction between gifts and housing investment. On
the one hand, column 1 in Table 4 indicates that Gift has a signi…cant and negative impact
on housing investment: the larger the gift, the smaller the housing investment. The negative
slope of housing investment re‡ects that the negative mixed partial derivative with respect tohousing and nursing services (the second channel) outweighs the positive income e¤ect (the …rst
channel). The results suggest that an informal care responsibility tends to be quite a weight17

The Keio Household Panel Survey is available at http://www.pdrc.keio.ac.jp/en/ (accessed on 15 March,2011).
18
The estimation results of the reduced form and the e¤ective gift tax rates are demonstrated in Table A4.

16

on children’s shoulders. On the other hand, column 2 in Table 4 suggests that Housing has asigni…cant and positive impact on gifts. This indicates that the e¤ect of uPsh is relatively large.
This is an interesting case, because even though parents are assumed to consider children’sP
19 Although the child and thewelfare (uChs ), their own private consideration (ush ) outweighs it.

parent react di¤erently, the signi…cant coe¢ cients suggest that a strategic interaction between
inter vivos gifts and housing acquisition may exist.
Next let us consider the impacts of the gift tax rate, children’s income, and the price of thecomposite good. As expected, column 1 demonstrates that an increase in the gift tax rate hasa signi…cantly negative impact on housing investments. The Child’s income in column 1 has
the expected and signi…cant sign. The Price index in column 1 suggests that the substitutione¤ect outweighs the income e¤ect, because the coe¢ cient is signi…cant and positive. Therefore,children tend to increase housing investment when housing-related conditions are a favorable
situation for them.
The Child’s income and Price index in column 2 have di¤erent signs to their counterpart.
This may indicate that parents possess altruistic preferences. As mentioned, parents increase
the value of gifts when their children are confronted with deterioration in housing-related
conditions. When the gift tax rate increases, altruistic parents react as well. A negative sign
implies that parents reduce the value of their gifts, because it decreases the e¤ectiveness of thegift for supporting children.
Let us brie‡y refer to other explanatory variables. The signi…cantly positive sign of Land
indicates that households who obtained land in advance make larger investments than others.
The coe¢ cient of LTC capacities in column 2 has the expected negative sign, indicating thatparents reduce the value of gifts when access of seniors to LTC institutions is improved. This
may indicate that parents possess the exchange motive as well. Moreover, this result may beconsistent to some extent with that of Izuhara (2004). She suggested that the link between
children’s support and transfers are increasingly being broken in Japan.20
19

Precisely, see Eq.(13).
Family wealth goes disproportionately to the next generation of men, especially the eldest son, because
patriarchy has been common practice in many Asian countries (Izuhara, 2008). In exchange, the eldest son
tacitly provides care to his parent. Japan, however, faces the most rapid growth in the proportion of elderly
20

17

Although Gift tax, Price index, and LTC capacity may be correlated with regional characteristics, Table 5 adds three geographical dummies to Table 4, because there may be other(cultural) di¤erences in both the children’s and parents’ behavior between areas. Although
the coe¢ cient of the gift tax in column 2 is insigni…cant, the signs of the coe¢ cients are thesame as those in Table 4.
Table 6 demonstrates the estimation results, which use the second type of average gift tax(Average tax 2) in the …rst step. Only the main variables are reported in Table 6, because
again the signs of the coe¢ cients are the same as those in Tables 4 and 5. Table 6 indicatesthat the results were similar, but less signi…cant. This appears to indicate that two-generation
families have a tendency to examine not the average gift, but the average down payment intheir vicinity.

5

The e¤ect of the gift tax cut on equilibrium housing investment

The joint determination of housing investment and gifts, i.e., the Nash equilibrium, is describedby the intersection of the reaction functions Eqs. (1) and (3). One of concerns in this paper is
to examine whether or not a small decrease in the gift tax rate increases housing investment
at the equilibrium. Let us denote the equilibrium level of investment as:
h = h (t; y; p; l0 ; q):Then we can calculate this equation result as follows:21@h= |{z} (@h=@t + @h=@g @g=@t):| {z } |{z}@tstrategic

…rst

(7)

secondWe call the …rst term in parentheses of the right-hand side of Eq. (7) the …rst e¤ect, the second
term the second e¤ect, andthe strategic e¤ect. The strategic e¤ect depends on the slope ofin the population in the world. Re‡ecting the heavy burden of care service provided by traditional families toelderly people, the LTC insurance system has been designed to promote a social care service through a market
approach as part of the socialization of care since 2000 (Izuhara, 2004).
21
Appendix C shows how this relationship is calculated.

18

the reactions functions:
=

1
hg

1

gh

;

where hg (= @h=@g) is the slope of the housing investment function, and gh (= @g=@h) is theslope of the gift function. The size offollows the following relationships:>1
if sign hg = sign gh:
0 < < 1 if sign hg 6= sign gh(8)Because both the theoretical and empirical results indicate a negative …rst e¤ect, a decreasein the gift tax rate unambiguously encourages housing investment in the equilibrium. The
second e¤ect suggests that the gift tax cut has an opposite impact on the equilibrium investment
induced by the …rst e¤ect if @h=@g and @g=@t have the same sign. In fact, the empirical results
suggest that both @h=@g and @g=@t are negative. Thus, promotion of housing investment
via the …rst e¤ect is dampened by the second e¤ect. In an extreme case, housing investment
decreases in equilibrium if the negative second e¤ect outweighs the positive …rst e¤ect. Thatis, our theoretical results suggest that there is a case where the Japanese gift tax reduction
produces a perverse e¤ect on housing investments, which is unexpected by the governmentand housing industry. Lastly, Eq. (8) suggests that both the …rst and second e¤ects arestrengthened by the strategic e¤ect when the slopes of the reaction functions have the same
sign, while they are weakened when the slope of the reaction functions have opposite signs.
The empirical results demonstrate that children and parents react di¤erently, and thereby thestrategic e¤ect becomes less than 1.
We can calculate how the gift tax reduction may change children’s housing investment in
the equilibrium using the estimation results in Table 4. From the linear speci…cation in Eqs.
(5) and (6), Eq. (7) can be rewritten as:
@hi
=
@
1
|{z}i
|
total

1
C P

{z

strategic( C + C P ):|{z} | {z }} …rstsecondFirst, given g, a one percent reduction in the gift tax rate increases housing investment
by approximately 115 thousand yen (the …rst e¤ect) from Table 4. Second, however, the one
percent reduction of the gift tax rate increases intergenerational transfers, and consequently it
19reduces housing investment along with the housing investment function by approximately 86
thousand yen (the second e¤ect). Because the …rst e¤ect outweighs the second e¤ect, reducing
the gift tax rate encourages housing investment by approximately 29 thousand yen. Thus, aperverse e¤ect seems not to occur. The strategic e¤ect, however, weakens the e¤ect of the gift
tax reduction on promoting housing investment from approximately 29 thousand yen to 24
thousand yen (1=(16C P ) + 0:84).

Discussion

There are several other items of note in this paper. First, the observations are primarily abouthouseholds who acquired a new detached house in the urban areas. Because condominiums andapartment buildings are quite popular in these places, we need these observations to consider
the overall impact of the gift tax reduction on housing acquisition.
Second, the data do not provide details of parents’characteristics. We thus cannot consider
whether or not parents have already passed away, whether parents are wealthy or not, and soon. This information may have a critical impact on parents’behavior.
Third, housing demand tends to depend on permanent income rather than on annual income. Children who have a high permanent income frequently purchase an expensive dwelling.
Moreover, parents whose children have a high permanent income may not donate a gift, because of altruism. Then, the lack of this information has a tendency to induce @h=@g < 0. To
obtain data on permanent income, however, we need more information on the children’s job,such as occupation and size of the company (Goodman and Kawai, 1982).22
Fourth, we may need to undertake more cross-national replications of this research. The
exchange model appears to be applied in many developed countries; such as European countries
22
To consider the second point, we limit the observation age to under 70. This is because parents whosechildren are aged 70 or over are more likely to pass away. Moreover, to consider the third point, we limit
observations to those with a mortgage. Children who do not have mortgages are more likely to have a highpermanent income. In addition to this sample selection, we control children’s income as follows. Householder’ssalary is generally based on the seniority system in Japan. Thus, if we control the tenure of householders, we
can measure children’s income based on their talents and abilities, which is suitable for examining the altruistic
motives of their parents. Instead of using realistic values of the child’s income, we thus use residuals of theregression of the child’s income on householder’s age (proxy variable for tenure) and its squared value. Evenconsidering these points, the empirical results are consistent with those in Table 4.

20

(Tomassini, Wolf, and Rosina, 2003; Angelini, 2007), the US (Bernheim, Shleifer, and Summers,
1985; Cox, 1987), and East Asian countries (Horioka, 2002; Yamada, 2006; Kureishi and
Wakabayashi, 2009; Yin, 2010). However, there are usually cultural di¤erences in parents’(children’s) attitudes toward children (parents) between countries. In some countries, it isexpected by society that children will look after their parents. In relation to this point, supposethat children with a high permanent income possess the altruistic motive.23 They may invest a
relatively large amount of money in housing, and at the same time have a tendency to provide
a service for their parents, while refusing parental gifts. This case also induces @h=@g < 0.
Fifth, basic exemption from the gift tax creates nonlinear budget constraints (Mo¢ tt, 1986).
An econometric approach of the piecewise linear budget constraints may be more appropriate
in considering this problem. We defer these issues to future research.

7

Conclusion

This paper o¤ered both a theoretical model and empirical results to examine strategic interaction between an inter vivos gift provided by parents and housing investment made by children.
This paper then theoretically and empirically considered whether a reduction in a gift tax has
a tendency to promote children’s housing investment or not.
First, we developed a theory of a two-generation family: parents and children. The theoretical model suggested that housing investment and gifts are dependent on each other. Japanese
detached house data are used to con…rm this theoretical result. Ironically, the empirical results demonstrated that the housing investment function is negatively related to inter vivos
gifts. The negative slope indicated that the child’s utility is assumed to decrease when housing investment and informal care increase simultaneously. This is more likely to occur when
informal care tends to be a heavy burden for children. This assumption might be true in an
aging society such as Japan. In addition, the empirical results suggested the interesting casewhere parents have the opposite reaction: the inter vivos gift function is positively related to23

For example, Johar, Maruyama, and Nakamura (2010) demonstrated that evidence for the exchange motive
is generally tenuous. Instead, they found that the role of …lial altruism has a positive and signi…cant e¤ect onparent–child coresidence. That is, children are more likely to start to live with their parent when their parent
has a health deterioration issue, while the income and assets of parents are not dominating factors of coresidence.

21

housing investment.
Second, the theoretical results indicated that the gift tax cut alters children’s behavior
toward an increase in housing investment for all gift values (the …rst e¤ect). The theoreticalresult also suggested that there is a possibility that the gift tax cut increases the value of theparental gift at all levels of housing investment. An increase in the gift, however, may discourage housing investment when housing investment is negatively related to inter vivos gifts (thesecond e¤ect). In fact, the empirical results indicated the housing investment function has anegative slope. The empirical results appeared to indicate that the …rst e¤ect barely outweighs
the negative second e¤ect. However, our theoretical and empirical results demonstrated thatthe opposite slopes of the reaction functions are likely to weaken the promotion of housing
investment made by the gift tax reduction (the strategic e¤ect). In sum, as expected by thegovernment and housing industry, the gift tax reduction tends to encourage housing investment in equilibrium, using one of the empirical results. The government and housing industry,
however, should consider both the second e¤ect and the strategic e¤ect, because these have atendency to depress the promotion of housing investment in equilibrium.

Acknowledgements
This research is part of a project of Housing Research and Advancement Foundation ofJapan. The former title of this paper was Report on Housing Demand and Financing. We
would like to thank Lawrence Brown, Wataru Kuereishi, Yung Lung Lee, and Michio Naoi,
as well as participants in seminars at Hitotsubashi University, Konan University, Ritsumeikan
University, Tohoku University, and University of Tokyo and conferences at ARSC, AsRES,
ENHR, JEA, and NARSC for their valuable comments. We are also grateful to the Japan
Federation of Housing Organizations for access to microdata. Part of this paper was written
while Shinichiro Iwata was visiting Department of Urban Studies, University of Glasgow. He
gratefully acknowledges its hospitality. The views expressed here are solely those of the authorsand do not re‡ect any of the institutions they belong to. This research was supported by Japan
Center for Economic Research.
22

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26

Appendix
A The sign of the housing investment function
The optimal level of housing investment satis…es:
uC
h

1 C
v = 0:p x(9)From the assumptions, the second-order condition satis…es:
C
C 1
Uhh
= uC
hh + vxx 2 < 0:p

The sign of the housing investment function then becomes:
@h
=
@g

uC
hs sg

C (1
vxx
C
Uhh

@h
=
@t

C g=p2
vxx
< 0;
C
Uhh

t)=p2

;

(10)
(11)

@h
v C =p2= xx C > 0;
@yC
Uhh
@h
=
@p

C x=p3vxC =p2 + vxx
;
C
Uhh

@h
v C =p2= xx C > 0:@l0Uhh

B The sign of the gift function
The optimal value of the gift satis…es:uPs sg

1
t)
C (1
+ uC
s sg + vx
q
p

0:

(12)

The optimal amount of the gift is zero when Eq. (12) holds with inequality, while it is positive
when Eq. (12) holds with equality.
The second-order condition for a maximum satis…es:
P
2
C
Vgg
= (uPss + uCss )sg + vxx

27

t) 2

(1
p

< 0:

The sign of the gift function then becomes:
@g
=
@h

C (1
uPsh sg + uC
vxx
sh sg
P
Vgg

C (1
@g
v C =p + vxx
= x
P
@t
Vgg

@g
=
@yC

;

(13)

;

(14)

C (1
vxx
t)=p2
< 0;
P
Vgg

@g
v C (1
= x
@p
@g
=
@q

t)g=p2t)=p2

C (1t)=p2 + vxx
PVggt)x=p2

;

(15)

1=q 2
> 0:
P
Vgg

The interpretation of @g=@p di¤ers when we consider the parent’s consumption. We rewrite
the parent’s utility function as follows:
V P = uP (h; s) + v P (xP ) + m + uC (h; s) + v C (xC );where xF (F = P; C) is F ’s consumption. The budget constraint can be rewritten as follows:yP = g + xP + qm:
Then Eq. (15) can be rewritten as follows:
P xP =pv P =p + vxx
@g
= x
@p

where

vxC (1

t)=p

C (1
vxx

t)xC =p;is the bordered Hessian and its sign is positive. Thus, in the case where the parent

consumes the composite goods, the parent considers not only changing the child’s welfare but
also changing his/her welfare.

C The Nash equilibrium and comparative statics
Suppose that Eq. (12) holds with equality: g > 0. The joint determination of housing
investment and gifts, i.e., the Nash equilibrium, is then described by the conditions Eqs. (9)and (12). Di¤erentiating these equations with respect to t, we then can calculate @h =@t as
follows:
CV P + UC V P
Uht
@h
gg
hg gt
= C P
;
CVP
@t
Uhh Vgg Uhg
gh

28

(16)

C and V P , are respectively the numerator of the right-hand side in Eqs. (11) and (14).
where Uht
gt

The denominator indicates the stability condition of the Nash equilibrium; we assume that it
is positive for stability. Substituting Eqs. (10), (11), and (14) for Eq. (16), we then obtain:@h=@t@h @h @g
+
@t
@g @t

29

:

Table 1
De…nition of variables
Variable
De…nition
Endogenous
Housing
The value of housing investment, in millions of yen
Gift
The value of gifts, in millions of yen
Gift tax ( )An e¤ective gift tax rate, percentage
Explanatory
Child’s income The total annual income before tax earned by all household
members, in millions of yen
Price index
The regional CPI which is the product of the CPI(2005=100) and the regional di¤erence index of consumer
prices (national average set equal to 100), percentage
Instrument
Land
A binary variable indicating that the household bought landin the last three years
LTC capacity
The capacity of long-term care institutions in each geographical category, thousand hospital beds per hundred thousand
elderly
Average tax 1
The average gift tax rate controlled by the average down
payment in each geographical category, percentage
Average tax 2
The average gift tax rate controlled by the average gift value
in each geographical category, percentage
Other control
Tokyo area
A binary variable indicating the unit is located in the Tokyo
area (reference)
Nagoya area
A binary variable indicating the units is located in the
Nagoya area
Osaka area
A binary variable indicating the unit is located in the Osaka
area
Provincial city
A binary variable indicating the unit is located in one of theprovincial cities

Notation
h
g
t
y
p

l
q

-

-

Note: Geographical category in Average tax 1 and 2 corresponding with the prefecture level forthree major metropolitan areas and the city level for four provincial cities. However, because
LTC capacity is only observed at the prefecture level, the four major cities are converted to theprefecture level.

Table 2
Descriptive statistics of variables
Variable
Housing (millions of yen)
Gift (millions of yen)
Gift tax (percent)Child’s income (millions of yen)Price index (percent)Land (dummy)
LTC capacity (1,000 beds/100,000 elderly)
Average tax 1 (percent)
Average tax 2 (percent)Tokyo area (dummy)
Nagoya area (dummy)
Osaka area (dummy)
Provincial city (dummy)
Observations

Mean
42.23
1.90
0.17
8.77
105.29
0.43
2.31
1.28
0.06
0.36
0.18
0.23
0.23

Std. Dev.
23.64
6.34
1.88
6.89
3.56
0.49
0.34
4.58
0.45
0.48
0.38
0.42
0.42
23,939

Min.
0.25
0.00
0.00
0.00
99.09
0.00
1.60
0.00
0.00
0.00
0.00
0.00
0.00

Max.
524.00310.0056.73
450.00112.61
1.00
3.26
35.55
5.49
1.00
1.00
1.00
1.00

Table 3
Mean for households with and without a gift
Variable
Total With a gift
Observations
23,9394,440
Housing (millions of yen)
42.23
41.28
Gift (millions of yen)
1.90
10.23
Child’s income (millions of yen)
8.77
7.54

Without a gift
19,499
42.45
0.00
9.05

Table 4
Estimation result (Average tax 1)
Housing
Variable
Coe¤.
Std.Err.
Gift–0.541
0.235
Housing
Gift tax–0.115
0.048
Child’s income
1.140
0.246
Price index
1.351
0.071
Land
23.5031.200
LTC capacity
Constant–136.761
8.217
Adj. R2
Log likelihood

Coe¤.
0.349
–0.159–0.824–0.332–7.77717.410Gift
Std.Err.
0.038
0.091
0.260
0.072
0.816
7.877

0.369
–26,302.3

Std.Err. obtained by bootstrap approximation using 200 resamples.
, , indicate signi…cance at the 1%, 5%, and 10% levels, respectively.

Table 5
Estimation result with regional dummies (Average tax 1)
Housing
Gift
Variable
Coe¤.
Std.Err.
Coe¤.
Std.Err.
Gift–0.854
0.391
Housing
0.346
0.025
Gift tax–0.1360.056–0.142
0.089
Child’s income
1.039
0.311
–0.8110.271
Price index
1.038
0.123
–0.4390.089
Land25.6042.140
LTC capacity–6.745
1.883
Nagoya area
1.163
1.264
1.150
0.716
Osaka area
0.436
0.901
0.357
0.676
Provincial city
–6.0891.437–2.192
0.787
Constant–109.854
12.02627.508
9.108
Adj. R2
Log likelihood

0.371–26,302.3

Std.Err. obtained by bootstrap approximation using 200 resamples.
,indicate signi…cance at the 1% and 5% levels, respectively.

Table 6
Estimation results (Average tax 2)
Variable Housing
Variablewithout regional dummies
Gift–0.795
Housing
Gift tax –0.051
Gift tax
with regional dummies
Gift–0.960
Housing
Gift tax –0.109
Gift tax
,

Gift
0.378
–0.1990.388–0.213indicate signi…cance at the 1% and 10% levels, respectively.

Table A1
Calculation method for the e¤ective gift tax rate
Gift taxes
E¤ective tax rates
Regular calculationb)t1 d1 g=g
1 = f(gSpecial calculation for gifts to acquire residence
Before 2003
) + 5 g=g
2 = f(= (g=5 b)t2 d2= (~g2 =5 + g g~2 b)t2=
= (~g2 =5 b)t2 d2
From 2003 onwards

3 = (g

if
d2 if
if
if

g g~2
otherwiseg g~2otherwiseg~3 )t3 =g

Notes: b is the basic exemption, where b =1.1 million yen.
tj (j = 1; 2; 3) is the gift tax rate. See Table A2 for the values of tj .
dn (n = 1; 2) is the deduction. See Table A3 for the values of dn .
g~o (o = 2; 3) is the cumulative exemption, where g~2 = 15 million yen and g~3 = 35 million yen.

Table A2
The gift tax rate table before 2003
g (million yen)t1 = t2 (%) d1 = d2 (ten thousand yen)
1.5 or less10
2 or less15
7.5
2.5 or less20
17.5
3.5 or less
2530
4.5 or less30
47.5
6 or less
35
70
8 or less
40
100
10 or less45
140
15 or less
50
190
25 or less
55
265
40 or less
60
390
100 or less
65
590
More than 100
70
1,090
Source: National tax agency

Table A3
The gift tax rate table from 2003 onwards
g (million yen)t3 (%)
2 or less10
3 or less15
4 or less20
6 or less30
10 or less40
More than 10
50
Source: National tax agency

Table A4
Estimation result of the …rst stage
Housing
Variable
Coe¤.
Std.Err.
Average tax 1–0.024
0.072
Child’s income
1.339
0.248
Price index
1.272
0.066
Land
19.601
0.314
LTC capacity
3.872
0.390
Constant–120.750
6.040
Adj. R2
Log likelihood

Gift
Coe¤.
–0.169–0.3200.015
5.732–4.224–10.217

Std.Err.
0.060
0.176
0.062
0.424
0.590
6.311

Gift tax
Coe¤.
Std.Err.
1.007
0.095
–0.227
0.190
0.614
0.155
7.001
1.122
–13.851
1.833–91.469
16.3860.369–26302.3

Std.Err. represents robust standard errors.
, indicate signi…cance at 1% and 10% levels, respectively.

–3247.8

The effective gift tax rate
60%
Regular

Before 2003

From 2003 onwards

50%
40%
30%
20%
10%
0%
0

5

10

15

20

25

30

35

40

Source : Authors’ calculations based on data in National Tax Agency

Figure 1. Gift tax schedule

45

50
55
60
Gift value (million yen)