Economists think about soaking the rich, a little

February 14th, 2012 by Philip Brasor & Masako Tsubuku

One of the most contentious issues to be argued in the next U.S. presidential election is whether or not to tax wealth. President Barack Obama believes the rich aren’t paying their fair share while Republicans are against any increase in taxes (with certain exceptions). Since Japan’s budget deficit is even worse than America’s, levying higher taxes on the rich would seem to be up for discussion here as well, but all we hear about is the consumption tax. Nevertheless, a number of Japanese economists have proposed a fuyuzei, or wealth tax, modeled on a similar idea that’s been used in Europe. The way the tax has been proposed makes its purpose twofold: while it should be able to generate lots of revenue for the government, it may also have the effect of getting dormant savings into circulation, which is just as important as reducing the national debt.

Even Mickey isn't safe

The proposal was recently explained in Tokyo Shimbun by Hiromichi Shirakawa, the chief economist for Credit Suisse. The basic idea is to tax the money in savings accounts and treasury bonds on an annual basis. Based on surveys conducted by the Financial Information Center, the total amount of money in savings accounts and treasury bonds is about ¥854 trillion, so if the wealth tax rate were set at 1 percent, the government could collect ¥8.5 trillion a year. In 2010, the amount of revenue generated by the consumption tax was ¥10.2 trillion.

Other economists have suggested variations on this theme, such as a graduated tax bracket system, meaning the more money you save, the higher the percentage of tax you would pay. Or, in order to really make it a tax on the rich, set a bottom limit for how much money is being saved, so that only people who fall above those lines pay the wealth tax. Of the ¥854 trillion mentioned above, 52 percent is controlled by persons with cash assets of ¥30 million or more.

According to the Bank of Japan, as of December 2011, individual cash assets in Japan amounted to ¥1,471 trillion, at least half of which is money in near zero-interest savings accounts. The wealth tax would not be levied on money invested in securities or insurance. As it stands, the government levies a flat 10 percent tax on capital gains from stocks, while it withholds 20 percent from interest income. Stock profits used to be taxed at 20 percent as well, but the government reduced it to spur investment with the aim of eventually returning it to 20 percent. The increase has been continually postponed, however, presumably because people still aren’t buying enough stock.

Shirakawa has advanced his idea on several TV shows and received numerous complaints from older people, whom the wealth tax would affect more since they have more savings than do younger people. In Tokyo Shimbun he said older people should think of their grandchildren, who will inherit this massive debt. But the main hurdle to introducing such a tax is lack of bureaucratic resources rather than political will. Because so many individuals keep the money in various accounts and/or invest them in various instruments, it is difficult for the Tax Bureau to determine exactly how much each citizen has in terms of assets. In fact, one of the arguments in favor of the controversial taxpayer ID number system currently under discussion is that it would make such calculations much easier, since all accounts and investments would be tied together through a personal ID number. (In fact, the government introduced the same sort of tax in 1950 but cancelled it after three years because it couldn’t get a bead on people’s assets.)

But what about so-called tansu yokin (savings in the wardrobe), meaning cash that is simply stuffed under a mattress or crammed behind the cookie jar, without any record that it even exists? No one has ever estimated how much cash is held secretly in Japan, though every once in a while you get some idea when an old house is torn down and a worker finds a stash of ¥10,000 bills; or an elderly person is swindled over the telephone by someone pretending to be his or her relative needing money right away to solve a problem. Last week, an old woman in Gifu handed over ¥60 million in cash to someone who said he was representing her son. Apparently, she had most if not all of this money on hand.

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5 Responses

  1. Great article, always like reading your posts. I think that while these sorts of taxes sound fantastic, they tend not to work. Why would you put your money in a Japanese account and be subject to more tax than interest? You could do better offshore, and the wealthy people are, the more likely they would be to pursue this option.

  2. While I agree with Rowan about money being sent abroad, I do think that it is about time for the government (and the people really) to start discussing how to get money circulating again. Clearly, large sums are resting in savings either in Banks or under Tatami mats and the governments futile attempts to bolster the economy only built up debt. Much like the rest of the world, Japan is suffering from a lack of cash flowing through the system. Older people are more likely to hoard their money (fair enough what with a pension system that seems incapable of policing fraud or ensuring that everyone is paying in), but this is going to cost Japan in the end. Birth rates are astoundingly low, jobs are leaving these shores, debt is skyrocketing and so on. So while this may be a futile endeavor, sitting on hoards of cash is damaging the economy far more than helping it. Where Americans have a spending problem, the Japanese have a huge saving problem. I’m not encouraging reckless spending of American proportions, but maybe people with a lot in savings could do more to help their family’s invest in schooling for their children/grandchildren, buy them houses/apartments, and so on. One of my grandmother’s favorite things to tell me is that I’ll be fine financially when she passes away. In the first place, I’d rather not rely on something that could change in value depending on economic conditions. Secondly, I think I’d much rather see my grandmother spend the money she worked so hard to save on things that are important to her so that she can see the fruit of her labor. Giving it to her grandchildren is a sweet gesture, but there are no guarantees that any one of us with be careful with it. I think that if the same thing is told to the elderly in Japan, they might reconsider something a little more practical to do with their money than just hoard it and hope for a better tomorrow.

  3. I think that under-the-mattress savings are more common than most people realise, but I also think that they are probably limited to the baby-boomer generation. Young people these days just don’t have the sense or the wherewithal to save money for themselves. Furthermore, they are all convinced that the government is going to bail them out, no matter what happens. Their elders are not quite so optimistic, and rightly so.

    Two anecdotal stories: a mature student told me of cleaning out her deceased mother-in-law’s home and discovering about 1,000,000 yen stashed away in a cupboard. An elderly student told me that she kept the same amount in her bedroom drawer, in case of “emergency.” (I begged her not to share this information with other people!)

    And lest you think it is limited to Japan, let me tell you that my New Zealand grandparents did exactly the same thing back in the ’70s … they hid a large sum of money in their home – amounting to roughly 10,000 dollars – simply because they didn’t trust the banks or the government. Whose to say that they were wrong?

  4. The consumption tax is a bad idea as it just falls on workers, which slows down the economy, but the big problem here is that we’re defining “wealth” too broadly. “Wealth” here includes plenty of things that aren’t actually capital, i.e. land.

    Land values are created by community activity and not by individuals like labor and buildings. Because site values are fixed, rather than tax people’s cash savings, tax the land values. Doing so requires a fraction of the bureaucracy required to administer an income or consumption tax because it only takes a computer-generated map. The other benefits are it’s an unavoidable tax and reduces land speculation and wasting of prime locations.

  5. Japan, of course, does tax land. In fact, revenues from property taxes go to both local governments and the central government. The main problem with raising this tax is that the authorities and the powerful construction/real estate industry don’t want anything that will further discourage home buying or building. As for land speculation, there hasn’t been much of that in Japan since the end of the bubble era. Property values continue to remain stagnant nationwide. And as far as controlling land use, such laws are already in effect, though probably not as effective as they could be. If a piece of land designated for residential use has no building on it, the owner pays more in taxes. Likewise if a piece of land designated for agriculture isn’t being used to grow anything, the tax is higher as well, but many owners get around this by planting a chestnut tree or two. For more information about property taxes, here’s an article we wrote recently.


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