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The issue of growing inequality and the question of how to deal with it has loomed large in the Lower House election campaign, which concludes Sunday, with even the right-leaning Liberal Democratic Party integrating related policies into its manifesto.

But one measure that had previously looked set to be a key policy has been noticeably absent, after Prime Minister Fumio Kishida did an abrupt U-turn on a possible hike to the capital gains tax — a pledge in his LDP leadership campaign — which was supposed to make the rich pay their fair share.

While the issue has been out of the spotlight this time, it could come back somewhere down the line, with parties of all stripes focused on a redistribution-oriented economic agenda.

Yet experts have called into question just how effective a hike would be at redistributing wealth.

The rate of the capital gains and dividends tax — which also applies to other financial gains, such as interest from savings — is fixed at 20% at present. That differs from income tax, where the rate varies depending on the level of income, with the maximum currently set at 55% for those with taxable income of ¥40 million or more annually.

Because financial gains typically account for a high portion of the total income of wealthy people, the tax rate on overall earnings begins to decrease once people’s income exceeds ¥100 million, which is dubbed “the ¥100 million barrier.”

Prime Minister Fumio Kishida speaks during a party leaders debate at the Japan National Press Club in Tokyo on Oct. 18. | REUTERS
Prime Minister Fumio Kishida speaks during a party leaders debate at the Japan National Press Club in Tokyo on Oct. 18. | REUTERS

For instance, the effective tax rate peaked at 27.9% for those with overall earnings between ¥50 million and ¥100 million in 2019, but it declined to as low as 16.1% among people earning ¥5 billion to ¥10 billion, according to the Finance Ministry.

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

“When you earn more than ¥100 million yen and become super-rich, your income tax rate actually drops. Do you think we can really gain understanding of this from the public?” said Akira Nagatsuma, a senior CDP executive, on a TV program on Oct. 17.

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

As an initial measure, Nagatsuma said that it is necessary to raise the rate to 25%, and that his party aims to eventually unify and merge the capital gains tax with that of the regular income tax.

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

A woman walks past a luxury retail store in Tokyo's Ginza shopping district on Oct. 7. | REUTERS
A woman walks past a luxury retail store in Tokyo’s Ginza shopping district on Oct. 7. | REUTERS

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

If the capital gains tax rate went up to 25%, it would increase tax revenue by around ¥550 billion, according to the report. Those earning more than ¥100 million would shoulder about ¥105 billion of that, while those with income of between ¥4 million and ¥12 million would likely be affected most — the tax burden on that demographic would come to around ¥200 billion.

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

It’s true that for people earning more than ¥100 million, stocks make up a greater percentage of their income. Yet there are quite a few people earning low or average amounts of income who invest in stocks, said Shungo Koreeda, a senior researcher at the Daiwa Institute of Research.

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

Thus, if the tax rate climbs, middle-class and low-income investors would bear an even greater burden, he said.

A stock board outside the head office of SMBC Nikko Securities Inc. in Tokyo on Oct. 14 | BLOOMBERG
A stock board outside the head office of SMBC Nikko Securities Inc. in Tokyo on Oct. 14 | BLOOMBERG

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

Nonetheless, investing in stocks is not that common in Japan and the level of investment lags that of other countries such as the U.S., something that the government has sought to remedy by encouraging people to invest in financial assets instead of leaving their money in savings. As such, a tax hike could also send a contradictory message, experts say.

Bank of Japan data shows that Japan’s household assets totaled ¥1.99 quadrillion as of June, with stocks and investment trusts accounting for only 10.5% and 4.5% of that figure, respectively, while 53.8% was cash and savings.

“The reality is that … it’s still not really a common practice to boost household assets through investing in securities in Japan,” said Koreeda. “Considering that, rather than raising the tax rate to gain more revenue, I think it’s more critical to stimulate people’s investment to foster the markets, which will naturally increase tax revenue.”

With a raise to the fixed capital gains tax unlikely to lead to redistribution of wealth, some politicians have proposed introducing a rate depending on the levels of financial income. For instance, Sanae Takaichi, now the LDP’s policy chief, proposed a hike for those with income from financial assets of ¥500,000 or more during the LDP’s leadership race.

An election notice board displaying posters of candidates in Tokyo's Minato Ward on Thursday | BLOOMBERG
An election notice board displaying posters of candidates in Tokyo’s Minato Ward on Thursday | BLOOMBERG

Given that wealth redistribution through a capital gains tax hike is not that simple, it should not take place in a hasty manner, and Kishida seems to want to avoid that as well, said Daisuke Kannari, research director at the Mitsubishi Research Institute.

The government should take the time to iron out the details, so that it can come up with changes that would facilitate the redistribution of wealth to people on low incomes, he said.

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

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