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POINT OF VIEW/ Charles Yuji
Horioka: Raising gift andinheritance taxes would kill fivebirds with one stone
SPECIAL TO THE ASAHI SHIMBUN
2010/09/13

Print

The Japanese economy remains in the doldrums, with the growthrate for real gross domestic product falling sharply from 1.0
percent in the October-December 2009 quarter and 1.1 percent inthe January-March quarter to a meager 0.1 percent in theApril-June quarter.
Moreover, the record strength of the yen in recent weeks threatens
to further weaken the Japanese economy, increasing the urgency
for additional economic stimulus measures.
At the same time, however, Japan's government debt-to-GDP ratiois the highest in the developed world and is rapidly approaching
200 percent. Thus, the reconstruction of government finances is anequally urgent task.
The problem is that these two goals--stimulating the economy andreconstructing government finances--are not necessarily
compatible, and it has become exceedingly difficult to realize thetwo goals simultaneously.
A tax cut or an increase in government spending may stimulate theeconomy, but it may at the same time further deepen thegovernment's debt. Conversely, a tax increase (for example, theconsumption tax hike proposed by Prime Minister Naoto Kan) or acut in government spending may help bring about reconstruction ofgovernment finances, but could also have a deleterious effect on
the economy.
However, it is not impossible to achieve the two goalssimultaneously. And in this essay, I would like to propose one
feasible way--increasing gift and inheritance taxes.

交通動画

マイタウン

Japan and most other developed countries impose taxes on gifts
and inheritances, even those from parents to children.
If people pass on their wealth to their children while they are alive(in the form of inter vivos transfers) or at death (in the form of abequest), they must pay gift and inheritance taxes.
However, if people spend all of their wealth on themselves, they
can avoid gift and inheritance tax payments.
And if gift and inheritance taxes are raised, the people who spend
their wealth on themselves can avoid even higher tax payments.
Rational people would increase their own consumption and reduce
the amount of gifts and inheritance to their children if gift andinheritance taxes go up.
Thus, increasing these taxes would stimulate household
consumption and the economy as a whole.
Moreover, higher gift and inheritance taxes could well lead to a risein revenue from those taxes. And the increase in household
consumption caused by hikes in gift and inheritance taxes could
boost revenue from the consumption tax.
Thus, as stated earlier, increasing gift and inheritance taxes cansimultaneously stimulate the economy and contribute toward thereconstruction of government finances.
Furthermore, an increase in gift and inheritance taxes will reduce
the amount of wealth passed on to children, easing the extent towhich wealth inequalities are passed on from generation togeneration. This will enable all Japanese to start life on a moreequal playing field and make Japan a fairer and more egalitariansociety.
In addition, raising gift and inheritance taxes would allow"longevity risk" (the risk of living a long life) to be "socialized," orborne by society as a whole.
My recent research shows that bequests from parents to children
are conditional on the children taking care of and providing
financial support to their aged parents. Such conditions are morecommon in Japan than in the United States, India, China and othercountries.
Thus, in Japan, children effectively bear the burden of longevity
risk (the risk of parents living a long life).
However, if gift and inheritance taxes are raised, parents will use
their own assets to cover their living expenses during old age
rather than concluding a so-called implicit annuity contract with
their children. Such a situation would free their children from theburden of longevity risk and improve their lives.
Moreover, if part of the increased revenue from higher gift andinheritance taxes is used to improve public pensions and long-termcare insurance, the longevity risk can be effectively "socialized,"
obviating the need for both parents and children to bear this risk
and making them both better off.
Raising gift and inheritance taxes will stimulate the economy,
contribute to reconstructing government finances, reduce theextent to which wealth inequalities are passed on from generation
to generation, and "socialize" longevity risk, thereby killing fourbirds with one stone.
But I prefer a different way to raise gift and inheritance taxes thansimply increasing the rates.
In Japan, land is greatly undervalued for gift and inheritance tax
purposes. Thus, pricing land at its full market value for gift andinheritance tax purposes will greatly increase the revenue
generated by these taxes--even without an increase in the rates.
Thus, increasing gift and inheritance taxes in this manner would
make it more equitable across asset types and allow a fifth bird tobe killed with the same stone.
My proposal to effectively raise gift and inheritance taxes by taxing
land at its full market value would produce at least five benefits
without any offsetting disadvantages. There seems to be no reason
not to implement such a plan.
Why settle for measures that stimulate the economy at theexpense of reconstructing government finances or that help rebuild
finances at the expense of an economic recovery when both goals
can be achieved simultaneously?
***The author is a professor of economics at the Institute of Socialand Economic Research, Osaka University. He was born in Boston
in 1956 and received his B.A. degree and Ph.D. from Harvard
University. He was awarded the Japanese Economic Association
Nakahara Prize in 2001.
***
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