Amid inequality debate in Japan, hike in capital gains tax could have an unexpected effect

The issue of growing inequalities and the question of how to deal with it have featured prominently in the Lower House election campaign, which ends on Sunday, with even the right-wing Liberal Democratic Party incorporating related policies into its manifesto.

But a measure that previously seemed to be a key policy has been notoriously absent, after Prime Minister Fumio Kishida flip-flopped on a possible capital gains tax hike – a pledge in his leadership campaign. PLD – which was supposed to make the rich pay their fair share.

While the issue hasn’t been in the spotlight this time around, it could come back at some point, with parties of all stripes focused on an economic agenda focused on redistribution.

Yet experts have questioned the effectiveness of a hike in redistributing wealth.

The capital gains and dividend tax rate – which also applies to other financial gains, such as interest on savings – is currently set at 20%. This differs from income tax, where the rate varies according to income level, with the maximum currently set at 55% for those with taxable income of 40 million yen or more per year.

Since financial gains typically make up a high share of the total income of rich people, the tax rate on overall income begins to decline once people’s income exceeds 100 million yen, which is dubbed “the barrier. 100 million yen “.

For example, the effective tax rate peaked at 27.9% for those with aggregate incomes between 50 million yen and 100 million yen in 2019, but it fell to 16.1% among those earning. 5 billion yen to 10 billion yen, according to the Ministry of Finance.

Some opposition parties, including the Constitutional Democratic Party of Japan (CDP), have also called for an increase to break this 100 million yen barrier.

“When you make over 100 million yen and get super rich, your tax rate actually goes down. Do you think we can really understand that from the public?” Said Akira Nagatsuma, senior manager of CDP, during a TV show on October 17.

He also pointed out that since some other rich countries’ tax rates for capital gains and dividends are around 30%, Japan’s is just too low.

As a first step, Nagatsuma said it is necessary to raise the rate to 25% and that his party ultimately aims to unify and merge capital gains tax with income tax. ordinary.

Given the situation, raising the capital gains tax may seem like a way to get the rich to pay more.

But a 2018 report by the Daiwa Institute of Research, based on data from 2015, showed that the tax hike would actually affect working-class and middle-class investors the most, not the wealthy.

If the capital gains tax rate increased to 25%, it would increase tax revenue by about 550 billion yen, according to the report. Those earning over 100 million yen would bear around 105 billion yen, while those with incomes between 4 and 12 million yen would likely be the most affected – the tax burden on this demographic would be around 200 billion. billion yen.

The average income of employees stood at 4.33 million yen last year, according to the National Tax Agency.

It is true that for people earning more than 100 million yen, stocks represent a larger percentage of their income. Still, there are quite a few low- and middle-income people who invest in stocks, said Shungo Koreeda, senior researcher at the Daiwa Research Institute.

“The amount of capital gains taxes and dividends they pay may be small, but when added up they pay a lot.”

So if the tax rate goes up, middle-class and low-income investors will bear an even greater burden, he said.

An online survey conducted by the Japan Securities Dealers Association in July, which surveyed 5,000 individual investors, found that about 70% of them earned less than 5 million yen.

Still, investing in stocks is not that common in Japan, and the level of investment is lower than in other countries like the United States, which the government has sought to address by encouraging people to invest in. financial assets instead of leaving their money in savings. As such, a tax hike could also send a mixed message, experts say.

Data from the Bank of Japan shows that Japanese household assets totaled 1.99 quadrillion yen in June, with stocks and investment trusts accounting for only 10.5% and 4.5% of that figure, respectively, while 53.8% were cash and savings.

“The reality is… it’s still not really common practice to increase household assets by investing in securities in Japan,” Koreeda said. “Considering this, rather than increasing the tax rate to earn more income, I think it is more essential to stimulate people’s investment to stimulate markets, which will naturally increase tax revenues. “

With an increase in capital gains tax unlikely to lead to redistribution of wealth, some politicians have proposed introducing a rate based on levels of financial income. For example, Sanae Takaichi, now LDP policy chief, proposed an increase for those with income from financial assets of 500,000 yen or more during the LDP leadership race.

Since redistributing wealth through an increase in capital gains tax is not that simple, it should not be done in a rush, and Kishida also seems to want to avoid this. said Daisuke Kannari, research director at the Mitsubishi Research Institute.

The government should take the time to work out the details, so it can come up with changes that would make it easier to redistribute wealth to low-income people, he said.

“There has to be a process to gain people’s understanding,” Kannari said.