The Small Saving Tax Exemption and Japanese Household Asset Allocation Behavior: Impact of the 1988 and 2006 Revisions (in Japanese)

This paper calculates effective tax rates on capital income (interest, dividends, and capital gains on equities) in Japan and analyzes the impact of the revision of the Small Saving Tax Exemption for interest income (the so-called Maruyu System) on Japanese household portfolios. My contributions are as follows: (1) I am the first to calculate effective tax rates on interest, dividends, and capital gains on equities from 1973 to 2001 and calculate the effective tax rates on assets to which the exemption applies (Maruyu assets) and those on assets to which the exemption does not apply (non-Maruyu assets). As a result, I found that (2) before the 1988 revision of the exemption, Maruyu assets such as bank and postal savings deposits were given more preferable tax treatment than non-Maruyu assets such as equities, as is the general perception in Japan, but after the 1988 revision, the situation became reversed, with non-Maruyu assets being given more preferable tax treatment than Maruyu assets. Moreover, (3) I use effective tax rates by age group in the empirical analysis, taking into account for the first time the amount of principal that is tax-exempt, and (4) I estimate asset demand equations by three-stage least squares to deal with the endogeneity of rates of return, which is so far not taken into account in analyses of the revision of Maruyu system and household portfolios in Japan. And (5) I calculate the amount of the change in holdings of each asset that is caused by the 1988 and 2006 revisions of the Maruyu system, and it turns out that not only the 1988 revision of the exemption but also the 2006 revision will promote a shift in household portfolios away from Maruyu assets and toward non-Maruyu assets, as expected, but that the magnitude of the impact of the 2006 revision is much less considerable than that of the 1988 revision in the short run as well as the long run.