Rich kids set to inherit higher taxes

December 14th, 2010 by Philip Brasor & Masako Tsubuku

Some members of the Democratic Party in the United States, not to mention a good portion of the American people, are upset that President Barack Obama caved in to pressure from the Republicans to extend the Bush tax breaks for the wealthiest Americans. The issue speaks to one of the most contentious aspects of capitalism as it operates in a democracy: Are people who benefit the most from the democratic free enterprise system obligated to pay a larger share toward its maintenance?

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A corollary to this debate is how much of their wealth should citizens be allowed to pass on to their heirs. In a purely socialist system, ideally it would be zero, but many who don’t necessarily advocate socialist government often support heavy taxation of inheritances for ethical and moral reasons: Why should the child of a rich person have special advantages in life just because of birth? Other people (usually the rich) counter that in a laissez faire economic system, no one has a right to tell anyone else what they can or can’t do with their money.

The Japanese government is now thinking about raising the inheritance tax. As everyone knows the country is running out of money, and already the Democratic Party of Japan has cut the corporate tax, increased the amount of the child allowance, and put off any increase in the consumption tax indefinitely. Because the widening income gap is becoming more of a topic in the news, the DPJ probably feels the public will be receptive to a boost on taxes for richer people.

There has always been a myth that the Japanese pay higher inheritance taxes than people in other developed countries. The myth was created during the property bubble of the late ’80s, when land was overvalued. The media was filled with horror stories of families having to sell off assets to pay tax bills when a head-of-household died. In actuality, very few families had to go so far to stay within the law, but the media didn’t point that out.

The inheritance law, which hasn’t changed since it was first enacted in 1958, offers a basic deduction (kiso kojo) of ¥50 million plus ¥10 million for every heir. For example, if a householder leaves ¥100 million to his wife and two children, the basic deduction comes to ¥80 million, meaning that the remaining ¥20 million is subject to inheritance tax, which is imposed in accordance with six graded brackets. Our theoretical family would pay about ¥1 million altogether on the ¥100 million they received.

The new inheritance tax system being proposed by a DPJ study group would reduce the initial deduction to ¥30 million and the deduction for each heir to ¥6 million, thus resulting in a ¥48 million basic deduction for our theoretical family. In addition, the number of tax brackets will be increased from six to eight. Under present law, the highest tax bracket after the deduction starts at ¥300 million per heir, which is taxed at 50 percent. The proposed law will change the upper bracket after deductions to ¥600 million in total for the inheritance, which will be taxed at 55 percent. The same family that paid ¥1 million now on an inheritance of ¥100 million would, under the new system, pay ¥3.15 million in inheritance taxes.

There are still some ways the rich will be able to wriggle out of these taxes if they plan ahead. The government may expand “privileges” for gifts to children. Already there is a law that allows parents to give money to their children with substantial tax breaks if the children use that money to buy homes. As it stands, parents can give up to ¥1.1 million a year to their children tax-free. The government is thinking of expanding this seizen zoyo (literally, “pre-death gift money”) to grandchildren. In the real world, most parents, especially those who live with their children and grandchildren, don’t declare such “gifts” since it’s often difficult to distinguish a gift from everyday outlays for household expenses that benefit offspring. But the government isn’t after these middle-class families. They’re after the upper echelon of earners to whom ¥1.1 million a year is a minuscule fraction of their fortunes. In any case, the government would be happy if children stimulated the economy by spending their inheritances rather than socking it away.

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3 Responses

  1. Philip & Masako:

    Thank you so much, for your delightful, and insightful articles about, Japan. I read the Japan Times, daily, and always look forward to your articles! Thx, again.

    Les

  2. Let me second that!

  3. Well I guess the answer is to keep most of your wealth overseas in foreign banks that can’t be repatriated and taxed in Japan once the breadwinner shuffles off the mortal coil.

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