Chapter 8
TAXES ON GIFTS AND BEQUESTS

A. The Form of Tax.

The estate and gift tax laws now in force in Japan are very similar to corresponding laws in the United States. However, experience in the United States with these laws has been by no means satisfactory. In fact, these taxes have been undergoing a considerable deterioration as a result of the growth of patterns of tax avoidance. The deterioration has been hastened by recent court decisions making increasingly fine distinctions in increasingly complicated cases.

The present Japanese law has been on the statute book only a short time. There is, therefore, not a great accumulation of experience with it. A substantial change in the method of taxation would not therefore involve so much loss of experience as would usually be the case.

Accordingly, we recommend that Japan proceed no further down the path that has led to so unsatisfactory a condition in the United States. It will be simpler and more equitable to adopt a different approach to the taxation of gifts and bequests.

Fundamentally, one of the chief aims of succession taxation is to check the accumulation of undue concentrations of wealth, while at the same time producing a contribution to the public treasury. One of the best forms of tax for this purpose is the "Accessions Tax". The accessions tax is a cumulative tax on the recipient of gifts and bequests. The tax is graduated progressively according to the total amount of gifts and bequests received by a given individual. The manner of its application is similar to that of the gift tax; when a gift or bequest is received, it is added to the total of taxable gifts and bequests previously received and a tax is computed on this total according to the current set of rates. A tax is also computed at the current set of rates on the previous cumulative total, and the difference between the two taxes is the tax currently due.

Such a tax has several advantages over the present separate estate and gift taxes, or even over an integration of these taxes.

1. The tax burden is distributed more equitably among heirs. Under the accessions tax, the total tax on the entire property will be lower if the estate is divided among two or more heirs than if it is all left to one person. Under the estate tax, on the other hand, the tax will be about the same, no matter how many heirs there are. The former result is to be preferred: a given sum of money spread thin among a number of people does not give rise to as much taxpaying ability as the same sum concentrated in the hands of one person.

2. The accessions tax promotes a wider distribution of wealth than does the estate tax. This is another aspect of the feature noted in paragraph 1, above, namely, that under the accessions tax the total tax is usually less when the estate is divided among a number of heirs. The larger aggregations of wealth are thus taxed more heavily. Also, owners of large amounts of wealth may have some inducement to distribute it more widely since the tax will then be less. The cumulative feature of the accessions tax prevents circumvention of this intention through multiple gifts. That feature also encourages donors to make gifts and bequests to those who have not already recived gifts and bequests from others.

3. The accessions tax is simpler than an integrated estate and gift tax combination. Only one uniform rate scale is needed instead of two. Also there are, on the whole, fewer complicated computations to perform. Cases in which one recipient receives substantial gifts on two or more occasions will probably fewer than cases in which one donor makes substantial gifts on two or more occasions.

4. Under the present estate and gift tax law, where each tax has its own separate rate scale, it pays the donor to split his giving carefully between gifts during life and bequests at death. If he achieves just the right combination, he minimizes his total gift and estate tax. Under the accessions tax, it makes no difference in total tax, whether the gift is made during life or at death. The accessions tax is thus a neutral tax in this sense; the present gift and death tax combination is not.

The accessions tax, so far as it applies to transfers at death, is simply an inheritance tax, and as such has a long record of experience in many countries. So far as it applies to gifts during life, it is similar to the well-known gift tax. The accessions tax that we recommend for Japan is therefore a combination of two familiar taxes, and affords no hazard in the way of experimentation with new types of taxation.

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B. Graduation by Relationship.

The present estate tax law calls for basic rates plus a surtax of 3 per cent on bequests to brothers, sisters, and ascendants in the direct line, and a surtax of 5 per cent on bequests to others than brothers, sisters, spouses, and ascendants and descendants in the direct line. Apparently the graduation is based in part on the idea that the greater is the normal expectancy of an individual to inherit from a given person, the smaller should be the tax, while the more the inheritance is in the nature of a windfall, the higher the tax.

Actually, of course, where there are no direct descendants, others, such as brothers, sisters, or nephews may have just as strong an expectation of inheriting as would direct descendants in the more normal case, so that the classification in the present law fails to fully achieve its purpose. Nevertheless, this would not be sufficient reason to abandon the present scheme of graduation were there not other competing considerations.

One of the capricious aspects of the estate tax is that it is levied at rather infrequent intervals. These intervals vary widely in length from case to case. Thus, in some instances, several estate taxes may be levied on a fortune within a short space of time, while in others, only one tax may be levied over a long period. To eliminate completely the inequalities in the burden of the estate tax resulting from variations in its frequency is very difficult, and results in a fairly complicated tax. However, some steps in this direction may be taken merely by changing the basis for the graduation among classes of heirs. In cases where the estate is likely to be taxed again fairly shortly the rates should be relatively low, while in cases where the estate is unlikely to be taxed again for a long time the tax should be relatively high. Thus, for example, the lightest rates might be granted to amounts going to ascendants, moderate rates in the case of bequests to brothers and sisters, aunts and uncles, and the like, fairly heavy rates for bequests to children, and the heaviest rates for bequests to grandchildren and others.

Bequests to the surviving spouse involve considerations in addition to the likelihood that the spouse will not long survive. The accumulation or preservation of an estate is often the result of the joint efforts of husband and wife. It is unfair to impose a substantial tax on a widow who succeeds to an estate which is in considerable measure due to her own efforts. Thus bequests to spouses may well be put in the lightest category, along with bequests to parents and other ascendants.

Moreover, taxing bequests to the wife at a light rate makes it unnecessary to provide elaborate trust devices to minimize tax by leaving the property, not to the wife, but to the children, in trust. Japan has not yet developed the trust device appreciably, and there is no reason to foster such a movement artificially by tax pressures.

Accordingly, if any sort of graduation according to relationship of recipient is to be retained, it is suggested that it be changed from the present to conform more nearly to the above pattern.

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C. Exemption for Dependents

The present estate tax exemption is a flat 50,000 yen in all cases. However, the needs of the family left behind by the deceased vary considerably from case to case, and it should be possible to take this into account in the exemption, particularly where there are minor children. A first charge on the estate should be a share in the cost of caring for the children until they are old enough to take care of themselves. Accordingly, it ire recommended that, where the deceased leaves minor children, there be allowed, an addition to the basic exemption, a supplementary exemption for each minor child of say 10,000 yen for each year by which the age of the child is less than, say, 18. Thus if a decedent leaves three children aged 10, 14, and 20, the total exemption would be increased by 80,000 yen for the eight years remaining to the ten years old child, plus 40,000 yen for the 14 year old child. Nothing would, of course, be allowed as an extra exemption for the 20 year old child, as he would be deemed old enough to take care of himself. This exemption would be allowed either against the bequest left to each child, or against the share of whoever would be responsible for the care of the children, such as a widow or guardian.

Suggestions have been made that this exemption should be computed on an annuity basis, that is, that in the above example the special exemption for the 10 year old child should not be the full 80,000 yen but only that sum necessary to purchase an annuity of 10,000 yen for eight years, using an interest rate of say 8 per cent. This would in practice require the taxpayer or the tax official to consult a table in order to determine the amount to be allowed in each case, rather than having a simple rule that can easily be remembered. Since the amount of the exemption is at best a very rough approximation, it does not seem that the extra complication and difficulty is justified by the extremely nebulous increase in the equity that would result. Indeed, if a table is to be used in any case, it would be appropriate to go further and vary the amount to be considered the proper share in the cost of care at various ages, i.e. to allow say 6,000 yen for the third year, and perhaps 14,000 yen for the thirteenth year, and so on. But even this hardly justifies the additional trouble which the use of such a table would involve.

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D. Rate Scales

The present estate tax rate scale goes up to a maximum of 60 per cent (if one excepts the very unlikely case of large estates going to collateral heirs). This compares with a present maximum income tax rate of 85 per cent (subject to an effective rate limit of 80 per cent). In addition, income is subject to other taxes such as the enterprise tax and the inhabitant's tax, as well as in some cases to corporation taxes. The combined burden on income may rise to nearly 100 per cent, if not in some cases to more than 100 per cent. There are no comparable taxes added on top of the estate tax.

On general principles, it seems that this relationship should be reversed and that the maximum tax rate on successions (i.e., gift, estate, or accessions taxes) should be at least as great as the combined maximum rates on income, including all surtaxes and other taxes levied on approximately the same base as the income tax.

First, a high rate of succession tax has far less serious effects on productivity and on effort than an income tax at a similar rate. A successions tax impinges only on the disposal by gift or at death of the fruits of an individual's efforts. The income tax, in addition, impairs the individual's disposal and management of these fruits, right from the time they are realized. In many cases, the succession tax is so remote as not to enter seriously into the thinking of the taxpayer, so that the effect of the tax on his efforts and productivity is likely to be negligible.

Second, a major purpose of highly progressive taxation is to prevent extraordinary large accumulations of wealth, which allow a concentration of control over the economy in the hands of a few individuals. Since succession taxes are based on wealth, they are more selective in dealing with concentrations of wealth than are income taxes. Income taxes include earnings in the tax base, and hence a giver effect on the concentration of wealth cannot so readily be achieved by the income tax without at the same time producing a greater degree of impairment of incentive than is the case for succession taxes. Succession taxes apply only where there is an actual concentration of wealth, whereas the high income tax rates would apply also where income is high without there being any corresponding concentration of wealth.

Third, succession taxes produce less impairment of good management and industrial efficiency than income taxes at comparable rates. Accumulation of wealth by an individual is to some extent an indication that that individual has a superior skill at management of enterprise. Accordingly, it is desirable up to a certain point to insure that that skill is effectively used by leaving a larger share of the nation's resources under the management of such an individual. The income tax takes the resources during the lifetime of such an individual. The succession tax takes them only after the skillful individual is no longer available.

Thus if a given amount of revenue is to be secured from the upper economic strata with a minimum of damage to the operation of the economy, and a maximum of restraint on the undue concentration of economic power, this aim will be achieved only when the maximum estate tax rates are higher than the maximum income tax rates. For example, if income rates on the top brackets are brought down to the point where the combined effect of the national tax, whatever local surtaxes are allowed, and whatever business income taxes and other taxes based in part on net income there may be, amounts altogether to say 65 per cent, it would be appropriate to have succession tax rates reaching to 70 per cent or 75 per cent for cases involving comparable classes of the population, for the more typical relationships between transferer and recipient.

At the other end of the scale, the present rates start at 10 per cent, and increase at first by rather small increments. This produces a large number of returns that yield relatively little revenue. Succession tax returns are relatively difficult to handle, involving as they do the appraisal of property and coming at irregular intervals throughout the year. Hence we recommend that the lowest rates in the principal tax schedule be increased so as to begin at 20 per cent or 25 per cent, and that the increase in revenue thus produced be offset by making the basic deduction higher than it otherwise would be. This will reduce the administrative load considerably, possibly reducing the number of taxable returns by as much as two-thirds. It will also increase the progressivity of the tax slightly.

In setting up the rate scale, it should also be borne in mind that an accessions tax will in most cases be levied separately on each of several parts of an estate. An estate amounting altogether to 1,000,000 yen might be divided into four or five separate bequests of say from 100,000 to 300,000 yen. Consequently, in order to have the same approximate burden, it is appropriate that a given rate apply at a lower point on the scale for the accessions tax than would be the case for an estate tax. On the other hand, the present rates were adopted in 1947, since which time inflation has substantially reduced the real levels to which the various rates apply. Accordingly, for the middle brackets of the rate scale, we recommend retaining the rates at approximately the present level.

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E. Contributions

Contributions to public welfare organizations are under the present law subjected to both gift and estate taxes, except for certain rather small exemptions. No other case is known to us where a gift tax is levied on charitable contributions. In the United States, bequests to non-profit public welfare organizations are exempt without limit.

The only serious objection to such an unlimited exemption is that in some cases it has been abused through the creation of charitable organizations controlled by the donor or his heirs. By this means taxpayers have been able to retain effective control over large properties without the payment of the proper tax. It would seem possible, however, to prevent such abuse by appropriate safeguards. It is therefore recommended that all contributions to non-profit public welfare organizations be exempted from both estate and gift taxes, provided the neither the donor nor his heirs stand to benefit in any material way, directly or indirectly, from the activities of the organization, (except, of course, as member of the general public). Thus the exemption would be denied where the organization held or was given stock in a corporation in which the donor or his heirs held an interest, or where it was given or held real property adjacent to property held by the donor or his heirs, or where in an way the donor or his heirs stood to receive special benefits from the organization. (Of course, where there is a complete quid pro quo, the transaction could be construed as a purchase of services rather than as a donation. The problem arises when the services are to be rendered to the heirs of the donor, and the right to such service is of such an intangible character as to escape inclusion in the value of the estate). Since abuses of this sort are more likely to occur with bequests than with gifts, it would be appropriate to apply the restrictions somewhat less rigorously to gifts.

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F. Credit in Case of Frequent Transfers

In order to avoid an undue burden where two or three transfers take place in rapid succession, the present estate tax law provides for a tax credit where a previous succession tax has been levied within five years. This is a sound principle, but in application the five year limit tends to operate somewhat capriciously and produces occasional hardships. To make this credit work more smoothly, it is suggested the credit be computed as, say, ten per cent of the previous tax for each full year by which the time between the two transfers is less than ten years. (If the added smoothness is felt to be worth while, the rule could in terms of 1 per cent per month for each full month by which the interval is less than 100 months.) Where the previous tax was an estate tax or was for some reason applicable to more than the property involved in the current transfer, a suitable apportionment of the previous tax will be required; this apportionment may well be the subject of administrative regulation.

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G. Summary of Recommendations on Succession Taxes

1. The estate and gift taxes are to be replaced by a cumulative accessions tax on the recipient of gifts and bequests.

2. There shall be excluded from consideration under this tax, for administrative reasons, the first 30,000 yen of gifts or bequests received during each year from any one donor or testator.

3. In addition to the exclusion under 2, there shall be allowed to each recipient a specific exemption of 150,000 yen over his entire lifetime.

4. The following schedule of rates is recommended:

Total accumulated gifts (before specific exemption) (Thousand yen)	Total accumulated gifts (after specific exemption) (Thousand yen)	Tax amount (Thousand yen)	Rate of tax on excess (marginal rate)
0	0	0	0
150	0	0	25%
350	200	50	30%
650	500	140	35%
1,150	1,000	315	40%
.
1,650	1,500	515	45%
2,150	2,000	740	50%
3,150	3,000	1,240	55%
4,150	4,000	1,790	60%
5,150	5,000	2,390	65%
.
7,150	7,000	3,690	70%
10,150	10,000	5,790	75%
15,150	15,000	9,540	80%
25,150	25,000	17,540	85%
50,150	50,000	38,790	90%

5. In the case of bequests to minor children of the decedent, or to a person responsible for their care, an additional exemption shall be allowed of 10,000 yen for each year by which the age of the minor child is less than 18. This shall not apply to gifts.

6. In the case of bequests to a surviving spouse, one-half of the bequest shall be exempt from tax, in addition to other exemptions. But this exemption shall not apply if the decedent was previoulsy a beneficiary of this provision. It shall not apply to gifts.

7. In the case of gifts or bequests received from descendants, younger brothers, or other relatives younger than the recipient, the tax shall be reduced by one-third.

8. In the case of bequests only, received from a person who himself received property by taxable gifts or bequests less than ten years previously, the current tax may be reduced by a credit equal to one-tenth of the previous tax for each year by which the interval between the two transfers falls short of ten years, provided that paragraphs 7 and 8 shall not be applied in any one case. The "previous tax" shall not exceed for this purpose, that part of the total tax paid on the previous transfer which the value of the present transfer (before tax) bears to the value of the preceding transfer (after tax).

9. For purposes of computing the accessions tax, gifts and bequests received since January 1, 1949, by a given individual shall, to the extent by which they have exceeded 150,000 yen, be included in the total of accumulated past gifts and bequests for the purpose of applying the rates to subsequent gifts or bequests received.

10. Contributions to public welfare, non-profit organizations from which neither the donor nor his heirs stand to derive any special benefit, either directly or indirectly, shall be entirely exempt from succession taxes.

11. Donors shall be required to file information returns on all gifts of more than 30,000 yen per year to any one person, under penalty of being assessed a fine equal to 20 per cent of the tax due, and of becoming liable for the full amount of the tax in case it is not paid by the recipient. (In such case, the tax shall be computed so as to include the tax as part of the gift.) Recipients shall be required to file returns in case the total gifts and bequests received during the year from any one individual amount to 30,000 yen or more, regardless of whether a tax is due.

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