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Behind the Screen: Death-Tax Cut in Japan Gets New Lease on Life

TOKYO -- When pondering their earthly demise, the rich in Japan are prone to conjure an old saw: Family fortunes disappear after three generations have paid their inheritance taxes.

No wonder. Japan has some of the highest death taxes in the world. The top rate here is a whopping 70%. It's 55% in the U.S., 40% in France and 30% in Germany.

But relief is in sight for those Japanese fat cats worried about shuffling off this mortal coil. Last week, Prime Minister Keizo Obuchi proposed to begin deliberations on a reduction of the top rate on inheritance taxes during the next regular session of parliament, set to convene in January 2000. Several mainstream press accounts suggest the rate may plunge to 50%.

If the measure passes, the rich, content in the knowledge a larger share of their financial legacies will go to their heirs rather than to the government, will presumably have greater incentive to pursue profits. This could serve as a long-term boost to the Japanese economy, stimulating more investment in the small and midsize companies that employ three-quarters of the nation's workforce.

Japan's inheritance-tax system has been an effective social leveler, funneling the fortunes of the wealthy back to the state and helping to hold virtually everyone in the middle class. Until recently, it was taboo for most politicians to even suggest revisions that would ease the tax burden on the rich. By doing so, a lawmaker risked getting labeled a rapacious capitalist, lacking a sense of social fairness.

Of course Obuchi didn't admit that his proposal was a sop to Japan's affluent. Rather, he raised it as part of a broader ongoing effort to make life easier for Japan's smaller companies, which have been hit harder by the crippling recession than the big multinationals. When the presidents of these small companies die, the family members left to pick up the pieces get stuck with huge inheritance taxes that can put considerable strain on them and the companies they take over.

The timing of the prime minister's announcement last week was no accident. Obuchi has two elections on the horizon. On Sept. 21, he must run for re-election as president of the ruling Liberal Democratic Party, or LDP. Though his challengers don't have a chance of defeating him, Obuchi wants to win big and stands to pick up a few popularity points with the tax-cut proposal from the three million LDP supporters eligible to vote in the presidential race. Many of these supporters are presidents of small firms in Japan and these represent a crucial voter bloc for the LDP.

Further over the horizon, Obuchi must call a lower house election by October 2000. Odds are that he won't do this until next year. That means in the run-up to the poll, he may be shepherding a tax cut through parliament. A mere coincidence, of course.

What are the prospects for getting this tax reduction passed? Very good. The Ministry of Finance, or MOF, gave a nod of approval last Thursday. And the MOF, still on the ropes for helping to drive this economy into its worst postwar recession, is in no position to oppose Obuchi, who is viewed by many as responsible for the rays of hope currently falling on the country.

Unsurprisingly, the average Joe probably won't see any immediate benefits from reducing the top rate on inheritance taxes, which applies to the incomes of those who inherit more than 2 billion yen ($18 million). If the opposition plays its cards right, it might be able to beat up Obuchi for pandering to the rich. Yet Japan's biggest opposition force, the Democratic Party, is in terrible shape. Plagued by debilitating infighting, the Democrats have not obtained a single significant political victory against the LDP since last fall when they forced Obuchi to accept some of their measures to bail out Japan's troubled banks.

Moreover, the LDP has already managed to slip though parliament income-tax reductions that favor the wealthy, and the party has emerged relatively unscathed. This suggests the LDP will probably be able to do the same with the inheritance-tax cut, especially if Obuchi keeps spinning it as an effort to ease the financial burden on small and midsize companies.

Japan may not be reforming as fast as many foreign observers would like. Nevertheless, Obuchi seems determined to revamp this country's tax system to bring it in line with international standards. The government has already lowered corporate taxes to 41% from 50%, and has cut the top bracket on income tax to 50% from 65%. And now this country's lawmakers are poised to lower inheritance taxes.

Although reducing this tax will tear a bit at the country's vaunted social fabric, it might just generate some more entrepreneurial spirit, as well as extra spending. At the very least, the tax cut will give the rich folk in this country less reason to moan about the fate of their millions when they pass into the pearly hereafter.

John F. Neuffer, a longtime observer of Japanese politics, is an analyst at Mitsui Marine Research Institute. He writes biweekly commentary for TSC and publishes an in-depth roundup of Japanese politics at his Web site, behindthescreen.com. The views expressed above are those of Neuffer and not necessarily those of MMR. This column is exclusive to TheStreet.com.

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