Saturday, August 14, 2010

Don't Count On the Dead

I was talking with an investment professional a while back about capital accumulation. At one point in the conversation, the investment professional insisted that Japan's inheritance laws prevented the accumulation of family wealth, with serious adverse consequences on the rate of new company formation -- the assumption being that you need a wealthy class of risk takers, either family members or angel investors, to provide the capital entrepreneurs need to start new businesses. I cannot remember whether the investment professional was criticizing the requirement of equal division of the property of the deceased (surviving spouses get 50% - otherwise legitimate heirs get equal portions of the property) or whether he was complaining that the level of the inheritance tax was too high.

Anyway, the purported stupidity of the inheritance laws was a big deal.

The memory of this conversation got me to thinking about inheritance taxes and what effect they might be having on the state's fiscal balances. The number of persons is increasing, surpassing the number of those being born first in 2005 and unstoppably from 2007 on. In between 1984 and 2009, the number of those dying annually has increased by 54%. It seemed to stand to reason that the state's total take from the estates of Japan's deceased must be increasing year-by-year, largely line with the increases in the number of deaths.

Data source:

"Surely," thought I, "though the total take from personal income has been decreasing from lower bonuses, less overtime, greater use of lower-temporary workers and a decreasing workforce -- at least the ever increasing cohort of those running down the curtain in a given year will be doing their share to make up for losses elsewhere. Yes, the fall in the values of most classes of assets post-Bubble and in the Lost Two Decades since will have seriously eroded the inheritance take...but with the increasing number of the deceased, the state should be enjoying at least a mild, if ghastly, increase in revenues from the dearly departed."

Not so. Not by a long shot.


The light blue bars are the total inheritance tax collected by the state, according to the Ministry of Finance. Inheritance revenues peaked in Heisei 5 (1993) at a little under 2.94 trillion yen. They have fallen precipitously and consistently since then. Last year (2009 - Heisei 21 - not on the graph) the state collected 1.52 trillion yen in inheritance taxes. Revenues have thus fallen 48% since 1993 even as the numbers of those "paying into the system" have risen 30%.

So despite their rapidly increasing ranks, not even the dead have been of much help in the Japanese state's search for a way to put its fiscal house in order. At some point the downward trend in inheritance revenues should reverse itself, probably sharply, as the immediate postwar generation begins passing into the Great Beyond, leaving behind their hoards, or whatever may be left of such after the postwar generation's having lived for so very long, for the state to plunder tax.

It ain't happened yet, though.


Jan Moren said...

The "investment professional"* might want to take a look at other societies with similar inheritance taxes and rules for division to close kin. Any actual effect on the investment climate is likely to hover somewhere insignificant to non-existent.

My guess is that this, like so many other nonsensical connections, stem from the same kind of spurious correlation:

* We have country (or company, or whatever) A, and country B.

* We see a difference in X - where X is investment rates, or pregnancy rates, or population growth - between A and B.

* We also see a difference in Y - which is something that we really care about deeply for political, economic, moral or religious reasons - between A and B.

* Therefore, Y is causing X, and A should stop Y immediately.

Which is utter nonsense.

But of course, accepting this would mean having to acknowledge that reality is messy, multifaceted and not likely to neatly follow any one ideology. So most people don't.

All of us fall prey to it at one time or another. The trick is to recognize when we're fooling ourselves, and being honest enough to admit it when we are.

* You would expect a "professional" to be somebody who actually knows what they talk about. Lately this does not seem to be the case, though.

RMilner said...

Many "investment professionals" don't have any qualifications for their trade.

OTOH the fate of the Long-Term Capital Management hedge fund shows that a group of very highly qualified partners can get it badly wrong.

Whatever the effect of Japanese inheritance tax law, there are still some very rich families in Japan.

PaxAmericana said...

This "investment professional" might want to ponder how Japan has sunk in so many ways since it switched from a focus on production to a focus on financial engineering. Maybe it's the bloated investment class that is pushing out the factory class, and therein lies far more of our problems that the inheritance laws.

Fat Tony said...

>Which is utter nonsense.

Or, in other words, social science. Your comment, by the way, Janne, is one of the most succinct critiques of it that I have seen, although you left out the part where the "objectivity" of the "scientist" must be assumed.