The Japanese media and politicians talk up rising income inequality in Japan and make it seem as if it’s a huge problem. While income inequality in Japan has indeed been rising in recent years — as it has in most other developed countries — this kind of rhetoric needs to be put in context. Doing so makes it obvious that income inequality is exceedingly low in Japan and the wealthy are taxed up the wazoo to keep it that way.
First, income inequality in Japan is actually very low compared to most other countries. The picture below (courtesy of Wikipedia) compares the Gini Index (a measure of income inequality) across many parts of the world. Japan has a very low Gini Index in this context, alongside countries in the Nordic region. On the other hand, inequality is highest in emerging markets, in particular Africa and South America. It’s interesting that even the U.S. — where the democratic presidential candidates are making inequality a key issue — has only moderate inequality in the global context.
Second, Japan has a progressive tax system which taxes the living daylights out of the wealthy in a myriad of ways. Personal income taxes have a highest margins rate of almost 56%, which breaks down to 45% coming from income tax, 10% from residential tax, and the balance from the 2011 Great Tohoku Earthquake tax. Only a few countries in the world have higher personal income tax rates higher than Japan. Then you have death taxes that can take away more than half of inherited wealth. The consumption tax was just hiked from 8% to 10% as of October 1 of this year, and might go higher over time. Highway tolls are the highest, or among the highest, in the world. Moreover there are separate taxes on property, cars, gasoline, tobacco, and on and on.
In my opinion, a car is now a luxury item in Japan. First, average prices on cars are higher in Japan than in other parts of the world. A Lexus costs more in Japan than in the U.S., despite the Lexus being a Japanese designed car made in Japan. There is a car purchase tax levied on the car when it is first purchased, which is separate from the 10% consumption tax. Then there is a fee that you need to pay the police to register the car. Every year there is a car tax that needs to be paid separate from the purchase tax; this tax increases as the car ages. A third of the gasoline price (currently around 140 yen per liter) is tax. Every time you drive on a highway you pay one of the highest tolls on earth. And while not a tax, parking space typically cost a fortune in metropolitan areas. It’s no wonder that young people don’t own cars anymore. The only saving grace is that public transportation is well developed and isn’t expensive.
A convoluted argument made by some people is that “all-in” taxes on the wealthy are not high enough in Japan. Here, “all-in” includes personal income tax as well as taxes on passive income such as capital gains, dividend income, and interest income. It’s true that the all-in tax rate tends to decrease above a certain level of income. A person making $1 million often has multiple streams of income. For example, maybe he receives $600,000 in salary from his company, $100,000 in dividends from his stock portfolio, $50,000 in coupons from his portfolio of government and corporate bonds, and $250,000 from capital gains in a good year where a few stocks worked out well. Note that I’m using U.S. dollars as it’s easier to absorb for readers of my English language blog, but note I’m mentally converting Japanese yen at 100 yen to the dollar. The $600,000 is taxed at roughly 56% after a few deductions, so let’s say he pays $300,000 in taxes here. The remaining $400,000 is taxed at roughly 20%, so that’s another $80,000 in taxes for an all-in tax rate of 38%.
Now take another individual making $100,000 in salary and nothing else. That still puts him in the top 10% of the income earning population so he’s doing well. The marginal tax rate for his income bracket is 33% plus 10% residence tax, with a small earthquake tax on top. Taking some deductions into consideration, his all-in tax rate is probably close very similar to the millionaire, even though the millionaire makes 10-fold more than he does.
But that’s not a valid argument for raising taxes further on the millionaire. First of all, dividend and interest income have already been taxed at the corporate level so it defies fairness and common sense to raise taxes on that even further. Second, the $250,000 in capital gains is the result of him buying stocks using after-tax dollars, so again we must ask whether double taxation is fair. Also remember he doesn’t claw back anything if the stock declines in value. Third, in most cases it’s vastly more difficult to earn $600,000 in salary than $100,000. Businesses generally pay people the market rate — and the market rate is higher for people with skills or talent that are rare, or for people willing to do things others are unwilling to do (e.g., work 100 hour work weeks, for example). Not to mention that someone making $600,000 is probably sacrificing a lot more — he’s probably spending less time with his family, he probably doesn’t have much time to go to the gym, and he doesn’t get access to the subsidies and other help that the government provides to people below a certain income threshold.
So it drives me a bit nuts when people here complain about inequality. It simply isn’t an issue at all. If anything, there simply isn’t enough inequality in Japan. And we already know from experimentation in China and Russia that forced equality (i.e., communism) just doesn’t work. We should instead celebrate hard work and talent, courage and leadership. We should celebrate people willing to take risks.
