FISCAL STUDIES, vol. 40, no. 1, pp.

45–70 (2019) 0143-5671

The Effect of the Recent Inheritance Tax

Reform on Bequest Behaviour in Japan∗
YOKO NIIMI†

†Asian Growth Research Institute

(niimi@agi.or.jp)

Abstract
This paper examines the behavioural response of households to wealth transfer
taxation using household survey data from Japan, with particular attention
being paid to the implications of different bequest motives that households may
have. The data reveal that relatively few households plan to reallocate the newly
taxable amount of wealth to their own consumption or inter vivos transfers in
response to the recent lowering of the basic deduction of the inheritance tax.
Our analysis shows that this partly reflects the fact that a relatively large
share of households have no or a weak bequest motive in Japan. However, our
estimation results also suggest that parents with an altruistic bequest motive are
more likely to avoid an increase in their children’s tax bill by reallocating the
newly taxable amount of wealth to inter vivos transfers than those with no or

∗
Submitted June 2017.
The author is grateful to the Yu-cho Foundation for providing her with data from its 2013 Survey
on Households and Saving. She is also grateful to the editor James P. Ziliak, two anonymous referees,
Nobuo Akai, Tatsuo Hatta, Masakazu Hojo, Charles Yuji Horioka, Toshihiro Ihori, Wataru Kureishi, Colin
R. McKenzie, Oleksandr Movshuk, Yanfei Zhou and other participants of a research seminar held at the
National Institute of Population and Social Security Research, the 15th International Convention of the
East Asian Economic Association and a conference on public finance jointly organised by the Institute of
Statistical Research and the Asian Growth Research Institute for their invaluable comments. This work
was supported by JSPS (Japan Society for the Promotion of Science) KAKENHI grant numbers 15H01950
and 18H00870, a project grant from the Asian Growth Research Institute and a grant from the Ministry of
Education, Culture, Sports, Science and Technology (MEXT) Joint Usage / Research Center at the Institute
of Social and Economic Research, Osaka University.
Keywords: bequests, inheritance tax, inter vivos transfers, intergenerational transfers, Japan,
precautionary saving, wealth transfer taxation.
JEL classification numbers: D31, D64, H26, H31.


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and 350 Main Street, Malden, MA 02148, USA.

46 Fiscal Studies

a weak bequest motive. By contrast, parents with an exchange bequest motive

are more likely to respond to the tax reform by reallocating the newly taxable
amount of wealth to their own consumption, though they seem to exhibit a
similar response to those with an altruistic bequest motive in some cases.

Policy points
r Bequest motives are found to play a key role in determining the behavioural
response of households toward changes in inheritance taxes, as suggested
by the theoretical literature.
r The behavioural response of households to the recent lowering of the
basic deduction of the inheritance tax is found to be relatively limited in
Japan, partly because of the relatively weak bequest motive of Japanese
households.
r Parents with an altruistic bequest motive are more likely to respond to the
tax reform by altering the timing of transfers to avoid an increase in their
children’s tax bill than those with no or a weak bequest motive.
r Parents with an exchange bequest motive are more likely to respond to
the tax reform by reallocating the newly taxable amount of wealth to their
own consumption, although they seem to exhibit a similar response to
those with an altruistic bequest motive in some cases.

I. Introduction
It is a stylised fact that wealth is distributed less equally than income or
consumption expenditure.1 Household wealth arises primarily from life-cycle
saving or from transfers of wealth across generations, including bequests
and inter vivos transfers. The last few decades have seen a growing body of
literature that examines the relative importance of intergenerational transfers
vis-à-vis life-cycle saving as determinants of the level and distribution of
wealth. Davies and Shorrocks (2000) review the existing work and conclude
that a reasonable estimate of the contribution of intergenerational transfers
to aggregate wealth is about 35–45 per cent. It has therefore become widely
recognised that intergenerational transfers play an important role in the wealth
accumulation process. As such, one way of tackling wealth inequality is to
impose a tax on intergenerational transfers.
Understanding the behavioural response of households to wealth transfer
taxation is critical for policymakers as failure to predict household response
may prevent them from achieving the intended objective of the tax policy.
Recent years have witnessed growing efforts to analyse the behavioural
response of households to wealth transfer taxes, an area that had received

1
Davies and Shorrocks, 2000.


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 Effect of the recent inheritance tax reform on bequest behaviour in Japan 47

relatively little attention previously. Empirical evidence reveals that while

households respond to changes in transfer taxes and try to minimise their tax
burden, their responses are relatively limited and households tend to maintain
control over their wealth despite the risk of facing greater tax liabilities as a
result.
As for theoretical analyses of wealth transfer taxation, the literature suggests
that bequest motives play a key role in determining the effect of transfer
taxation on household behaviour. Parents with no or a weak bequest motive
are expected to be unresponsive to transfer taxation. On the other hand, parents
who transfer their wealth to their children for altruistic reasons are expected to
be more responsive and are more likely to engage in tax avoidance behaviour
to maximise the (net-of-tax) amount of wealth that their children receive from
them. As for parents who transfer wealth to their children in exchange for
personal services rendered by their children (for example, attention and/or
old-age care provision), their response to transfer taxation is theoretically
ambiguous and is therefore an empirical question.
This paper aims to examine the behavioural response of households
to wealth transfer taxation using household survey data from Japan, with
particular attention being paid to the implications of different bequest motives
that households may have. In so doing, it makes two contributions to the
literature. First, to the best of the author’s knowledge, this paper is the first
attempt to empirically relate the behavioural response of households to transfer
taxation to bequest motives. While the nature of bequest motives is the key
building block for the theoretical analysis of transfer taxation,2 we still lack
empirical work that directly examines the implications of bequest motives for
the behavioural response of households to transfer taxation.
Second, this paper examines the behavioural response of households to
transfer taxation in Japan for the first time, to the best of the author’s knowledge.
Empirical work on the effect of transfer taxes on household behaviour has so
far been based largely on data on the United States (US). It would thus be
interesting to see whether previous findings obtained for the US hold for other
parts of the world. In particular, given that the household response to such taxes
is likely to depend on bequest motives, different behavioural responses may
be observed in countries where bequest motives differ from those commonly
observed or assumed in previous studies for the US. Japan offers an interesting
case to study, as a previous international comparison analysis reveals that
bequest motives are relatively weak in Japan in comparison with the US.3
The first Survey on Households and Saving (Kakei to Chochiku nikansuru
Chousa), conducted in Japan by the Yu-cho Foundation (Yu-cho Zaidan) in
2013, included unique questions that asked respondents how they plan to

2
Kopczuk, 2013.
3
Horioka, 2014.


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respond to the expected revision of inheritance and gift taxes in Japan, which
became effective on 1 January 2015. This revision was part of the 2013 Tax
Reform, which passed the Diet (the Japanese parliament) in March 2013; as a
result, this revision regarding inheritance tax policy had already been decided
by the time the survey was conducted in November–December 2013. The data
from this survey also contain information on households’ bequest and saving
motives. By exploiting such data, it is possible to analyse how households
plan to respond to changes in tax policy and what factors, including bequest
and saving motives, can explain the observed differences in household
response.
The rest of the paper is organised as follows. Section II reviews the
literature that examines the behavioural response of households to transfer
taxation. Section III provides a brief description of the recent changes in the
structure of inheritance and gift taxes in Japan. Section IV describes the data
and empirical methodology. Estimation results are presented in Section V.
Section VI discusses the limitations of the present analysis. Section VII
summarises the key findings and discusses some policy implications.

II. Literature review

Growing efforts have been made in recent years to analyse theoretically and
empirically the behavioural response of households to transfer taxation.4 As
far as theoretical work is concerned, the literature suggests that the effect
of transfer taxation on wealth accumulation and intergenerational transfer
behaviour depends critically on the nature of bequest motives.5 The literature
on bequest motives broadly consists of three strands in which bequests are
assumed to be accidental, altruistic or strategic.
The first strand stems from an extension of the life-cycle model whereby
bequests are thought to arise accidentally (i.e. no bequest motive). Because of
uncertain lifetimes and precautionary saving for unforeseen income or health
shocks, a positive amount of wealth may be left unconsumed and passed on to
the next generation.6 Such bequests can be considered accidental or involuntary
bequests and parents with no bequest motive are expected to be unresponsive
to changes in transfer taxation.
The second strand of the literature is based on the altruistic model whereby
altruistic parents are assumed to care about the welfare of their children and
to use transfers to compensate for the lower earnings of their children and/or

4
See Kopczuk (2013) for a survey of the literature on the effect of taxes on intergenerational transfers.
5
See Cremer and Pestieau (2011) for a useful survey of the theoretical literature on wealth transfer taxation
in which they develop the optimal tax structure under alternative bequest models. See also Laitner and
Ohlsson (2001) for a comprehensive review of theoretical models of bequest motives and their implications
for public policy, including estate taxation.
6
Davies, 1981; Hurd, 1987 and 1989.


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 Effect of the recent inheritance tax reform on bequest behaviour in Japan 49

earning differences among their children.7 Altruistic parents derive utility from
their own consumption and from their children’s consumption and, as such,
they care about the (net-of-tax) amount of transfers that their children receive
from them. An increase in inheritance taxes essentially implies a reduction
in the (net-of-tax) amount of transfers that their children receive. As a result,
we would expect altruistic parents to reallocate wealth between their own
consumption and transfers to their children to maximise their utility level when
the tax reform takes place, but how they will reallocate depends critically on
the elasticity of the marginal utility of consumption and the elasticity of the
marginal utility of bequests.
However, when inter vivos transfers are taxed separately from bequests and
when inter vivos transfers are tax-advantaged, as in the cases of Japan and the
US,8 parents have the alternative option of responding to a tax increase by
altering the timing of transfers to their children while keeping the allocation
of their wealth between their own consumption and transfers to their children
constant. In this case, altruistic parents are, ceteris paribus, expected to increase
the amount of inter vivos transfers, at least up to the amount for which gift taxes
are exempted, to avoid a reduction in the (net-of-tax) amount of transfers that
their children receive from them.9 This is the situation Japanese parents are in,
and our empirical analysis will examine specifically whether parents with an
altruistic bequest motive are more likely to engage in tax avoidance behaviour
by altering the timing of transfers than those without a bequest motive.
The third strand of the literature is based on the exchange model whereby
parents bequeath in exchange for attention or services from their children.10 The
exchange model predicts that transfers will be positively related to the services
provided by their children, and an increase in inheritance taxes essentially
implies an increase in the price that parents need to pay to obtain services from
their children. If tax-advantaged inter vivos transfers are taxed separately from
bequests, parents can, in principle, avoid a tax increase simply by accelerating
the timing of transfers, as in the case of parents with an altruistic bequest
motive.
However, in the case of parents with an exchange bequest motive, they want
to give bequests or inter vivos transfers to their children only if their children
provide, for example, old-age care. Under these circumstances, it might be
too costly or too risky for parents to hasten the timing of transfers to their
children because this would mean that they lose bargaining power vis-à-vis
their children. And if parents do not hasten the timing of transfers, they will
have to pay higher inheritance taxes, which implies that the price of services
7
Barro, 1974; Becker and Tomes, 1979.
8
There are annual exemptions for gift taxes in both Japan and the US. In addition, in the case of the US,
the gift tax is calculated on a tax-exclusive basis while the estate tax is calculated on a tax-inclusive basis.
9
Nordblom and Ohlsson, 2006.
10
Bernheim, Shleifer and Summers, 1985; Cox, 1987.


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from their children increases relative to the price of such services that can be
purchased from the market. This, in turn, means that the response of parents
with an exchange bequest motive to the tax increase is likely to depend on how
elastic their demand for their children’s services is with respect to the price
change. If parents’ demand for their children’s services is inelastic, an increase
in inheritance taxes may induce parents to maintain the amount of transfers
that their children receive from them by altering the timing of their transfers
(as in the case of altruistic parents). By contrast, if parents’ demand for their
children’s services is elastic, the tax increase may induce them to give up
seeking services from their children and instead to reallocate the newly taxable
amount of wealth to their own consumption (for example, for the consumption
of long-term care services that their children would have provided otherwise).
Which response parents exhibit is an empirical question.
Despite the extensive emphasis in theoretical work on the role of bequest
motives in determining households’ response to wealth transfer taxation, most
empirical studies examine households’ response to transfer taxation without
linking it explicitly to the bequest motives parents may have. This paper tries
to fill this gap in the literature by examining empirically the effect of bequest
motives on households’ response to the recent lowering of the basic deduction
of the inheritance tax in Japan using unique information on bequest motives.
Nevertheless, bequest motives alone may not be able to explain the
behavioural response of households to wealth transfer taxation. Findings
from empirical studies that look at the response of inter vivos transfers to
gift taxes suggest that, while parents respond to tax incentives and make
inter vivos transfers to reduce the burden of taxation, they tend not to take full
advantage of opportunities to use inter vivos transfers as a way of reducing tax
liabilities.11 Having an exchange motive might be one of the possible reasons
why parents want to hold on to their wealth,12 as noted earlier. However,
given that medical and long-term care expenditures can be significant prior to
death,13 precautionary saving could be another explanation for why parents do
not make full use of the tax-advantaged nature of inter vivos transfers. Niimi
and Horioka (2018b), for example, show that precautionary saving is one of
the key determinants, if not the most important one, of elderly households’
saving behaviour in the case of Japan. We will therefore examine in this
paper whether the purpose of household saving (for example, precautionary or
retirement saving) affects the way households respond to transfer taxation.
Another area we would like to investigate is the effect of the receipt of
intergenerational transfers on households’ response to transfer taxation. Cox
and Stark (2005) emphasise the importance of a ‘family tradition’ approach

11
For example, McGarry (2001) and Poterba (2001).
12
Kopczuk, 2007.
13
See, for example, De Nardi, French and Jones (2010).


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linking inheritances that parents receive to their own bequest behaviour where
a tradition is seen partly as a habit, partly as a norm and partly as a goal.
Under this approach, a tradition is thought to affect not only the shape of the
marginal utility of bequeathing but also its level. Niimi and Horioka (2018a),
for instance, find that the receipt of intergenerational transfers increases the
likelihood of parents leaving bequests to their own children in both Japan and
the US.

III. Inheritance and gift taxes in Japan

In Japan, an inheritance tax is imposed on the total amount of wealth received
by the recipient. Effective 1 January 2015, a number of changes were made
with regard to inheritance and gift taxes pursuant to the 2013 Tax Reform that
was part of the Comprehensive Reform of Social Security and Tax. The most
important revision was a reduction in the basic deduction of the inheritance
tax by 40 per cent, from ‘50 million yen plus 10 million yen multiplied by
the number of statutory heirs’ to ‘30 million yen plus 6 million yen multiplied
by the number of statutory heirs’. For instance, if the decedent had a wife
and two children, the number of his statutory heirs would be three and the
basic deduction in this case would be 48 million yen (about US$436,000).14
This would have been 80 million yen (about US$727,000) before the revision.
If the total value of the decedent’s assets exceeds this amount, each of his
heirs would be required to pay an inheritance tax on the taxable amount of
wealth received.15 It is the effect of this change in the basic deduction of the
inheritance tax on household behaviour that will be analysed in this paper. As
part of the same reform, the number of tax brackets for the inheritance tax
was increased from six to eight and the tax rate for the highest bracket was
increased for a taxable amount of more than 600 million yen from 50 per cent
to 55 per cent.
As for inter vivos transfers, a gift tax is imposed on the value of such
transfers in Japan. There is an annual exemption of 1.1 million yen (about
US$10,000) per recipient. It is thus possible to take advantage of the basic
deduction in the gift tax system to reduce the burden of inheritance taxes by
making a small gift each year. Effective 1 January 2015, the gift tax structure
was also revised by reducing the tax rate in cases where donees are the children
or grandchildren of the donor while raising the tax rate for the highest bracket
for a taxable amount of more than 45 million yen from 50 per cent to 55 per cent.
In addition, there are currently various tax exemptions for gifts from parents
14
Based on an exchange rate of US$1 = 110 Japanese yen.
15
In Japan, the surviving spouse is entitled to a substantial credit against the assessed inheritance tax.
Minors under the age of 20 and those with disabilities also receive a tax credit. Moreover, there is a separate
tax exemption system for the succession of family businesses, and business-related assets such as unlisted
shares fall into this category.


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and grandparents that are used for housing acquisition, education, marriage
and childcare.
The reduction in the basic deduction of the inheritance tax and the increase
in inheritance tax rates were implemented mainly to respond to the significant
reduction in land values since the collapse of the bubble economy and to
prevent the persistence of inequality. On the other hand, the revision of the
gift tax structure and the creation of gift tax exemptions for education etc.
were intended to encourage the early transfer of assets from elderly to younger
generations and thereby boost consumption and promote the revitalisation of
the economy.16
Note that the basic deduction of the inheritance tax was increased previously
in 1988 in response to the sharp rise in asset prices. This resulted in a significant
increase in the average taxable amount of wealth per donor and a reduction
in the percentage of tax-paying cases in that year. The reduction in the basic
deduction of the inheritance tax in 2015 could thus be considered as a reflection
of the government’s desire to restore the deduction to its level prior to the 1988
reform. After peaking in 1992 (at about 346 million yen), the average amount
of taxable wealth per donor steadily declined, due in large part to the decline
in land values since the collapse of the bubble economy, and it was just over
200 million yen in 2014.17 As for the percentage of tax-paying cases, it had
reached almost 8 per cent in 1987 but been just over 4 per cent since the
mid 2000s (4.4 per cent in 2014). However, as a result of the revision of
inheritance tax policy that became effective on 1 January 2015, the percentage
of tax-paying cases increased to 8.0 per cent and the average amount of taxable
wealth per donor declined to about 141 million yen in 2015.
As for the significance of wealth transfer taxation for the economy as a
whole, the share of estate, inheritance and gift tax revenue as a percentage of
gross domestic product was about 0.39 per cent in Japan in 2016, increasing
slightly from about 0.36 per cent in 2014, which is much higher than the average
share for the Organisation for Economic Co-operation and Development
(OECD) member countries (about 0.13 per cent in 2015).18 These figures
indicate that wealth transfer taxes are not a major source of revenue in most
countries. Limited revenue makes the elimination of such taxes a realistic
policy option, and a number of developed countries, such as Australia, Canada
and Sweden, have indeed repealed these taxes.19 Japan’s case therefore seems
to deviate from the trend observed in some parts of the world.

16
This paragraph is based on information provided by the Ministry of Finance (http://www.mof.go.jp/
tax_policy/publication/brochure/zeisei13/index.htm).
17
The figures in this paragraph are from the Ministry of Finance (https://www.mof.go.jp/tax_policy/
summary/property/e07.htm).
18
The figures in this paragraph are from OECD Revenue Statistics (https://stats.oecd.org/Index.aspx?
DataSetCode=REV). Note that the figure for 2016 is estimated/provisional.
19
Kopczuk, 2013.


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IV. Data and methodology

1. Data

The data used for the empirical analysis come from the Survey on Households
and Saving, which has been conducted in Japan by the Yu-cho Foundation
biennially since 2013 with the aim of better understanding households’
livelihood and saving behaviour. It collects detailed information on saving,
housing, wealth, labour supply, consumption, pensions and bequests. We
use the 2013 wave of this survey, which was conducted during the period
November–December 2013, because unique questions regarding inheritance
taxes were included, as explained below.20 A sample of households with two
or more people in which the head of the household is 20 years old or above
was drawn to be nationally representative using a two-stage stratified random
sampling procedure. Out of 5,000 households, 1,734 households completed
the questionnaire.
While the response rate seems relatively low, a comparison of this sample of
1,734 households with census data collected in 2010 shows that the sample data
exhibit similar demographic patterns to those of the census data in terms of such
aspects as household heads’ age and marital status (see Table A1 in the online
data appendix). As for data on financial wealth, the average level of financial
assets was found to be about 12 million yen in the Survey on Households
and Saving, which is relatively close to the average level of financial wealth
(about 11 million yen) reported in the 2013 Survey of Household Finances (see
Table A2 in the data appendix). The latter survey is conducted annually by the
Central Council for Financial Services Information, an organisation for which
the Bank of Japan serves as the secretariat. Homeownership rates as well as
household heads’ characteristics are also similar to those reported in the 2013
Survey of Household Finances. These comparisons seem to suggest that the
sample collected by the Survey on Households and Saving is a reasonably
representative sample.
In the case of the 2013 wave, the survey included questions asking
respondents how they would respond to changes in inheritance taxes. More
specifically, the following questions were included:
The government is currently considering lowering the basic deduction of the inheritance
tax from the current ‘50 million yen plus 10 million yen multiplied by the number
of statutory heirs’ to ‘30 million yen plus 6 million yen multiplied by the number of
statutory heirs.’ If this revision is implemented, would you make adjustments so that
the amount of your household’s bequest is below the threshold of the basic deduction?
Choose one from the following options:
(1) Make adjustments to ensure that it will be below the basic deduction
20
The second Survey on Households and Saving was conducted in November–December 2015, but
unfortunately it does not contain a panel component. Moreover, the questions regarding inheritance tax
policy were included only in the 2013 wave.


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(2) Do not plan to make adjustments to ensure that it will be below the basic deduction
(3) It does not matter to me whether or not the basic deduction is lowered

If you chose (1), how would you make adjustments? Choose one from the following
options:

(1) Reallocate to consumption

(2) Reallocate to inter vivos transfers
(3) Make charitable donations
(4) By other means

If you chose (2) or (3), what are the reasons for not making any adjustments? Choose
any options that apply:

(1) Because the expected size of my bequest is already less than 30 million yen
(2) Because the expected size of my bequest is already significantly greater than
50 million yen
(3) Because I am not very concerned about taxes
(4) For other reasons

By exploiting the answers to these particular questions, this paper analyses what
factors, including bequest and saving motives, affect households’ response to
changes in inheritance tax policy in Japan.

2. Estimation sample

Since we would like to analyse how changes in wealth transfer taxation will
affect households’ bequest behaviour, we focus our analysis on the behaviour
of those who have children. While empirical evidence shows that bequest
motives are prevalent even among people without children,21 the questions
regarding bequest plans in the Survey on Households and Saving relate only
to bequests to respondents’ children. We therefore drop households without
children from our estimation sample. After excluding households without any
children and those with missing information on key variables, we are left with
951 observations in the sample.
We further exclude households that plan to revise their bequest plans
in response to the lowering of the basic deduction of the inheritance tax
by making charitable donations (six households) or by other means (eight
households), given the relatively small numbers of such households and the
inappropriateness of including them in the other groups described below,
reducing the sample size further to 937 observations.
Using respondents’ answers to the above questions, households’ reactions
to the lowering of the basic deduction of the inheritance tax can be broadly
categorised into the following three groups: (i) those who reallocate the

21
Kopczuk and Lupton, 2007.


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 Effect of the recent inheritance tax reform on bequest behaviour in Japan 55

TABLE 1
Expected response to the change in inheritance tax policy
Reallocate the Reallocate the Do nothing Do nothing –
newly taxable newly taxable already under
amount of wealth amount of wealth the exemption
to consumption to inter vivos transfers level

No. of households 107 122 176 532

Share (%) 11.42 13.02 18.78 56.78
Source: Calculations based on data from the Survey on Households and Saving.

newly taxable amount of wealth to their own consumption; (ii) those who
reallocate the newly taxable amount of wealth to inter vivos transfers; and
(iii) those who do nothing. According to Table 1, about 11 per cent and
13 per cent of households would reallocate the newly taxable amount of wealth
to consumption or to inter vivos transfers to their children, respectively, to avoid
taxation.
The table also shows that about three-quarters of the sample would not revise
their bequest plans despite the change in the inheritance tax. Households that
would not revise their bequest plans were also asked why they would not do
so. Many were already under the exemption level, while about 19 per cent of
the sample would not change their plans for various reasons, the most common
being that they are not so concerned about taxation.22 Indeed, households’
inattention to tax consequences is suggested as one of the possible explanations
for households’ limited reaction to transfer taxes by Kopczuk (2013).
As mentioned above, the last column of Table 1 shows that we also observe
many households (more than half of the sample) that would not revise their
bequest plans simply because the expected size of their bequests is less than
30 million yen, the minimum taxable level. Given that their reaction is due
mainly to the fact that they would not be affected by the change in the
inheritance tax, these households are excluded from the estimation sample,
which reduces the sample size further to 405 households.23 We compare this
estimation sample with the original sample of the Survey on Households and
Saving in terms of the basic socio-economic characteristics of households and
find that the estimation sample remains a reasonably representative sample
(see Table A3 in the data appendix).

22
This group also includes those who would not revise their bequest plans because the expected size of
their bequests is significantly greater than 50 million yen (16 households) and those with other reasons for
not making any adjustment (34 households).
23
The exclusion of such households helps remove households that may be altruistic but do not plan to
leave a bequest to their children because the solution to their optimisation problem is the corner solution of
no bequest (for example, because they are too poor or because their children are much better off than they
are).


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3. Empirical methodology

Given that there are multiple responses that households can make to the
expected reduction in the basic deduction of the inheritance tax, as illustrated
in Table 1, a multinomial logit (MNL) model will be estimated to identify
the key determinants of households’ response to the change in transfer tax
policy. The MNL model predicts the probability of a particular outcome out of
several unordered alternatives. In this case, we have three possible outcomes
or household responses, namely: (1) reallocate the newly taxable amount of
wealth to their own consumption; (2) reallocate the newly taxable amount
of wealth to inter vivos transfers; and (3) make no adjustment. The variable
indicating this household response is the dependent variable of the MNL model
to be estimated in this paper, with the third option of making no adjustment
being the base category.
The main variables of interest are those pertaining to households’ bequest
motive, which are constructed as follows: (i) altruistic bequest motive equals 1
if the household wants to leave a bequest no matter what; (ii) exchange bequest
motive equals 1 if the household wants to leave a bequest on the condition that
their children provide care during old age or take over the family business;
and (iii) no or a weak bequest motive equals 1 if the household is not making
any special efforts to leave a bequest but will leave whatever is left or if the
household does not want to leave any bequests.
Given that inter vivos transfers are taxed separately in Japan, a household
with an altruistic bequest motive would be expected to reallocate the newly
taxable amount of wealth to inter vivos transfers to avoid an increase in their
children’s tax bill (i.e. outcome 2), as discussed in Section II. A household
with an exchange bequest motive would also be expected to adjust its bequest
plans to avoid taxes, but whether it does so by increasing its own consumption
(outcome 1) or inter vivos transfers (outcome 2) is an empirical question. If
the household has no or a weak bequest motive, it is likely to keep its bequest
plans as they are (i.e. outcome 3).
We also include variables that indicate the shares of precautionary saving
and retirement saving in total saving as households’ saving motives may affect
how they respond to transfer taxation. For example, if a relatively large portion
of saving is attributable to precautionary motives, bequests are likely to be
accidental or involuntary, and households are less likely to respond to changes
in transfer tax policy. Similarly, if a relatively large share of their saving is for
retirement, households are less likely to leave bequests intentionally and, as a
result, they are less likely to respond to changes in transfer tax policy.
Moreover, whether individuals themselves have received any bequests
and/or inter vivos transfers from their parents and/or parents-in-law may affect
their own bequest behaviour, as discussed in Section II. To examine this, we
include a variable that equals 1 if the household has received or expects to


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 Effect of the recent inheritance tax reform on bequest behaviour in Japan 57

receive bequests and/or inter vivos transfers from the parents and/or parents-
in-law of the household head.24 We would expect the (expected) receipt of
intergenerational transfers to increase the probability of the household making
inter vivos transfers to avoid taxes (i.e. outcome 2) based on the idea that the
family tradition of bequeathing is thought to affect not only the shape of the
marginal utility of bequeathing but also its level.25
The level of wealth may also affect households’ response. It would have
been ideal to calculate the value of net worth consisting of financial assets
and non-financial assets net of total debt. Unfortunately, the data used for this
analysis do not contain information on the value of non-financial assets. We
therefore construct the wealth variables using information on financial assets
only, but we include a dummy variable for whether the household (i.e. the
household head and/or his/her spouse) owns a house or a condominium as a
supplementary variable. Financial assets in this paper include only marketable
assets such as deposit accounts, stocks and mutual funds. The wealth variables
are expressed as quintiles of financial assets, which are defined separately for
five age groups to account for age differences in wealth accumulation.26 Other
explanatory variables include the characteristics of the household head, such
as his/her age, gender, educational attainment and marital status.27

V. Estimation results
1. Descriptive statistics

Table 2 shows the summary statistics of the explanatory variables included in

the estimation. The average age of household heads is about 55 years, and the
majority of them are male and married. About one-third of household heads
have a bachelor’s or higher degree. About 70 per cent of households own a
house or a condominium and about 41 per cent have received or expect to
receive bequests and/or inter vivos transfers from the parents and/or parents-
in-law of the household head.
Turning to financial wealth, households have, on average, about 13 million
yen of financial assets. As described earlier, the financial wealth variables are
expressed as quintiles that account for age differences in wealth accumulation.
The average levels of financial wealth are about 0.3, 2.8, 7.5, 15.6 and
41.7 million yen for the first, second, third, fourth and fifth quintiles,
respectively. These figures suggest that only those in the fifth quintile are
24
Unfortunately, because of the way in which the question is phrased, we cannot distinguish those who
received intergenerational transfers in the past from those who are expecting to receive them in the future.
25
Cox and Stark, 2005.
26
The age groups used are (i) under 35, (ii) 35–44, (iii) 45–54, (iv) 55–64 and (v) 65 or older.
27
Due to data limitations, we could not control for whether household heads are widowed or for the
number of children they have, even though such information would shed light on the number of statutory
heirs, which affects the amount of the basic deduction of the inheritance tax.


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58 Fiscal Studies

TABLE 2
Summary statistics
Variable Mean

Household head’s characteristics

Age group
Under 35 0.09
35–44 0.23
45–54 0.17
55–64 0.22
65+ 0.29
Female 0.07
Married 0.92
Educational attainment
Junior high school 0.09
High school 0.51
Junior college 0.07
University or above 0.33
Wealth
Wealth quintile (age adjusted)
1st quintile 0.21
2nd quintile 0.20
3rd quintile 0.20
4th quintile 0.20
5th quintile 0.19
Homeowner 0.70
(Expected) receipt of intergenerational transfers 0.41
Saving motives
Share of precautionary saving in total saving 0.33 (0.29)
Share of retirement saving in total saving 0.19 (0.23)
Bequest motives
No or a weak bequest motive 0.59
Altruistic bequest motive 0.36
Exchange bequest motive 0.05

No. of observations 405

Note: Standard deviations are in parentheses.
Source: Calculations based on data from the Survey on Households and Saving.

subject to inheritance taxes. Note, however, that these levels are households’
current levels of financial wealth and that they are likely to increase
subsequently, especially among younger households. Moreover, one should
bear in mind that real assets are not included in these figures, as explained in
Section IV.3. Real assets comprise a substantial share of household wealth and
therefore of bequests, although beneficiaries enjoy a relatively large exemption


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 Effect of the recent inheritance tax reform on bequest behaviour in Japan 59

for bequests received in the form of real assets in Japan. Hence, we would
expect that households in other quintiles may also be subject to inheritance
taxes.
Table 2 also shows that, on average, about 33 per cent of total saving is for
precautionary purposes and 19 per cent is for retirement. For elderly households
(65 years old and above) with non-zero financial wealth, we find that about
52 per cent of saving is for precautionary purposes and 30 per cent is for
retirement. This contrasts sharply with the small share (less than 4 per cent) of
saving for bequests. These figures suggest that a significant portion of bequests
is likely to be accidental or involuntary in the case of Japan.
It is therefore not surprising to find that about 59 per cent of households have
no or a weak bequest motive (Table 2). About 36 per cent have an altruistic
bequest motive whereas about 5 per cent have an exchange bequest motive.
If we do not exclude households that intend not to make any adjustments to
their bequest plans in response to the lowering of the basic deduction of the
inheritance tax because of the small size of their expected bequests, the shares
of households with an altruistic and an exchange bequest motive are about
29 per cent and 5 per cent, respectively, in our sample.
Horioka (2014) conducts an international comparison analysis of bequest
motives using data from the ‘Preference Parameters Study’ of Osaka
University, which was conducted in China, India, Japan and the US. Our
figures for the shares of households with an altruistic and an exchange bequest
motive are very close to those obtained for Japan by Horioka (about 27 per cent
and 5 per cent, respectively). Horioka also finds that altruistic bequest motives
are much more common in the US (about 58 per cent) than in Japan, while the
share of those with an exchange bequest motive is found to be relatively low
in the US, at about 3 per cent, as is the case for Japan.

2. Regression results
a) Main results
We estimate an MNL model by using ‘no adjustment’ as our base category.
Table 3 reports the regression results in terms of average marginal effects. We
first estimate an MNL model using the basic explanatory variables only, and
then add the bequest and saving motive variables to the estimation models. The
results for the basic explanatory variables are broadly similar between these
two specifications, suggesting that we do not seem to face a serious issue of
multicollinearity between our key variables – namely, the bequest and saving
motives – and the other variables. To shed further light on this, we construct
a correlation matrix for the explanatory variables (see Table A4 in the data
appendix). The size of the correlation coefficients does not seem to be very
large except for the correlation between the female and marriage variables,
which is because most household heads are male and female household heads


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60

TABLE 3
MNL results
Outcome 1: consumption Outcome 2: inter vivos transfers Outcome 3: no adjustment
Marginal Standard Marginal Standard Marginal Standard Marginal Standard Marginal Standard Marginal Standard
effect error effect error effect error effect error effect error effect error

2018 Institute for Fiscal Studies

Bequest motives
(None or weak)
Altruistic −0.043 (0.045) 0.196∗∗∗ (0.049) −0.153∗∗∗ (0.051)
Exchange 0.213∗ (0.113) 0.167 (0.109) −0.381∗∗∗ (0.071)
Saving motives
Share of precautionary 0.081 (0.081) 0.107 (0.084) −0.188∗∗ (0.088)
saving
Share of retirement 0.041 (0.109) 0.080 (0.111) −0.121 (0.118)
saving
Fiscal Studies

Household head’s
characteristics
Age group
Under 35 0.097 (0.089) 0.138 (0.095) 0.168∗ (0.098) 0.128 (0.098) −0.264∗∗∗ (0.089) −0.267∗∗∗ (0.093)
35–44 0.154∗∗ (0.062) 0.181∗∗∗ (0.066) −0.029 (0.065) −0.008 (0.069) −0.124∗ (0.071) −0.173∗∗ (0.074)
45–54 0.006 (0.061) 0.034 (0.064) 0.059 (0.073) 0.069 (0.075) −0.065 (0.078) −0.103 (0.080)
55–64 0.109∗ (0.060) 0.124∗∗ (0.060) −0.044 (0.062) −0.029 (0.063) −0.065 (0.070) −0.096 (0.070)
(65+)
Female 0.500∗∗ (0.213) 0.538∗∗∗ (0.197) 0.266∗∗∗ (0.076) −0.264∗∗∗ (0.081) −0.233 (0.175) −0.274∗ (0.150)
Married 0.260∗∗∗ (0.062) 0.273∗∗∗ (0.051) −0.124 (0.241) −0.048 (0.227) −0.136 (0.238) −0.225 (0.225)
(Continued)
 TABLE 3
Continued
Outcome 1: consumption Outcome 2: inter vivos transfers Outcome 3: no adjustment
Marginal Standard Marginal Standard Marginal Standard Marginal Standard Marginal Standard Marginal Standard
effect error effect error effect error effect error effect error effect error
Educational attainment
(Junior high school)
High school 0.214∗∗∗ (0.061) 0.222∗∗∗ (0.057) 0.062 (0.084) 0.095 (0.076) −0.276∗∗∗ (0.090) −0.317∗∗∗ (0.084)
Junior college 0.263∗∗ (0.106) 0.300∗∗∗ (0.105) −0.101 (0.105) −0.071 (0.098) −0.162 (0.129) −0.229∗ (0.123)
University or above 0.133∗∗ (0.065) 0.149∗∗ (0.062) 0.089 (0.091) 0.134 (0.084) −0.222∗∗ (0.099) −0.283∗∗∗ (0.093)
Wealth
Wealth quintile
(1st quintile)
2nd quintile 0.152∗∗ (0.066) 0.138∗∗ (0.068) −0.064 (0.068) −0.112 (0.071) −0.088 (0.077) −0.026 (0.080)
3rd quintile 0.075 (0.063) 0.067 (0.066) 0.118 (0.075) 0.051 (0.077) −0.193∗∗ (0.077) −0.118 (0.080)
4th quintile 0.124∗ (0.066) 0.109 (0.068) 0.024 (0.073) 0.003 (0.076) −0.148∗ (0.079) −0.112 (0.080)
5th quintile 0.111 (0.068) 0.094 (0.070) 0.014 (0.075) −0.023 (0.078) −0.126 (0.082) −0.071 (0.084)
Homeowner 0.094∗ (0.049) 0.102∗∗ (0.048) −0.076 (0.057) −0.087 (0.056) −0.018 (0.059) −0.014 (0.058)
(Expected) receipt of −0.058 (0.045) −0.061 (0.045) 0.138∗∗∗ (0.048) 0.111∗∗ (0.048) −0.080 (0.051) −0.051 (0.050)
intergenerational

C

transfers

No. of observations 405 405 405 405 405 405

Pseudo R2 0.081 0.118 0.081 0.118 0.081 0.118
Note: ∗∗∗ , ∗∗ and ∗ denote statistical significance at the 1 per cent, 5 per cent and 10 per cent levels.
Effect of the recent inheritance tax reform on bequest behaviour in Japan

Source: Estimation based on data from the Survey on Households and Saving.

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61
62 Fiscal Studies

are largely unmarried.28 Nevertheless, because the average marginal effects of

both the female and marriage variables are estimated to be significant for one
of the outcomes (see Table 3), being female seems to have an additional effect
on households’ response to transfer taxation even after controlling for marital
status. Moreover, since the estimated effects of our key variables – namely,
bequest and saving motives – remain the same even if we drop the female or
marriage variable,29 we have kept both variables in the regression analysis.
We focus on the regression results for the full specification for the rest of
our discussion. Table 3 shows that the probability of making no adjustment to
their bequest plans in response to the lowering of the basic deduction of the
inheritance tax is significantly lower for households with a bequest motive than
for those without – about 15 and 38 percentage points lower for households
with an altruistic and an exchange bequest motive, respectively. This is in line
with the theoretical prediction of a limited response of households with no
bequest motive to transfer taxation.
In the case of households with an altruistic bequest motive, the probability
of reallocating the newly taxable amount of wealth to inter vivos transfers is,
on average, about 20 percentage points higher than for those with no or a weak
bequest motive. This suggests that parents with an altruistic bequest motive
are more likely to engage in tax avoidance behaviour to prevent an increase
in their children’s tax bill than those with no or a weak bequest motive, as
expected.
On the other hand, our regression results suggest that the probability of
reallocating the newly taxable amount of wealth to consumption is, on average,
about 21 percentage points higher for households with an exchange bequest
motive than for those with no or a weak bequest motive. Given that having
an exchange bequest motive does not seem to have a significant effect on the
probability of reallocating the newly taxable amount of wealth to inter vivos
transfers, these results suggest that parents’ demand for services from their
children is relatively elastic with respect to the price of services that their
children provide in exchange for the receipt of bequests. In other words,
parents with an exchange bequest motive are more likely to reallocate the
newly taxable amount of wealth to increase their own consumption (including
the consumption of services purchased through the market) rather than trying
to avoid an increase in their children’s tax bill by making earlier transfers of
wealth to their children in response to an increase in inheritance taxes.
Turning to the effect of saving motives, while the share of saving for
retirement does not seem to have a significant effect on the behavioural

28
The size of the correlation between the no or weak bequest motive and altruistic bequest motive
variables is also relatively large, but this is not surprising given that the three bequest motive variables are
mutually exclusive.
29
The regression results are available from the author upon request.


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 Effect of the recent inheritance tax reform on bequest behaviour in Japan 63

response of households to transfer taxation, the share of precautionary saving

is found to be significantly and negatively associated with the probability of
making no adjustment to bequest plans. These results suggest that households
with a relatively high share of precautionary saving are more likely to make
adjustments to their bequest plans to avoid taxes. This seems contrary to
expectation, but it might be that some parents use part of their precautionary
saving to make adjustments (i.e. to make earlier transfers of wealth to their
children) if they require assistance from their children. In other words,
precautionary saving could be multipurpose and it may be diverted to inter vivos
transfers pursuant to an exchange motive in the future.
As for the rest of the regression results, we find that the probability of
making no adjustment to bequest plans in response to the reduction in the
basic deduction of the inheritance tax is lower if household heads are aged 44
or below in comparison with those aged 65 or above. This suggests that the age
of the household head matters for the impact of transfer taxation on household
behaviour. If changes in tax policy occur when the household head is relatively
advanced in age, it might be more difficult for him/her to make adjustments to
his/her bequest plans. This seems to be consistent with the findings of Kopczuk
and Slemrod (2001) that expected taxation over an individual’s lifetime matters
more than the tax rate prevailing at death.
It is interesting to find that female-headed households appear to be highly
responsive to changes in the inheritance tax. The regression results show
that female-headed households are more likely to avoid the tax increase by
reallocating the newly taxable amount of wealth to their own consumption
rather than by reallocating it to inter vivos transfers compared with male-headed
households. Although we control for the level of household financial assets,
female household heads may be more concerned about financial insecurity in
the future than their male counterparts and, as a result, may be more likely to
ensure that their resources, which would end up being paid to the government
as taxes otherwise, are used for their own purposes.
The results also illustrate that households with relatively highly educated
household heads are more likely to revise their bequest plans in response to the
reduction in the basic deduction of the inheritance tax by reallocating the newly
taxable amount of wealth to their own consumption. This might be due to the
fact that educated individuals are more likely to have the necessary knowledge
and ability to respond to changes in tax policy. The level of wealth does not
seem to have a significant effect on the behavioural response of households
to transfer taxation in most cases. On the other hand, owning a house or an
apartment increases the probability of reallocating the newly taxable amount
of wealth to consumption by about 10 percentage points.
Finally, as expected, the probability of reallocating the newly taxable
amount of wealth to inter vivos transfers is, on average, about 11 percentage
points higher for households that have received or expect to receive bequests


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and/or inter vivos transfers from the parents and/or parents-in-law of the
household head than for those not receiving such transfers. Parents who have
received or expect to receive intergenerational transfers themselves are thus
more likely to avoid an increase in their children’s tax bill by altering the
timing of their transfers in response to the revision of the inheritance tax.
This may be explained by family tradition whereby children’s behaviour is
influenced by the example set by their parents’ behaviour,30 as discussed in
Section II. Alternatively, households that have received or expect to receive
intergenerational transfers may be more knowledgeable about possible actions
they could take to avoid the inheritance tax and, as a result, they may be more
likely to engage in tax avoidance behaviour than households not receiving such
transfers.

b) Robustness checks
Since our estimation sample includes households whose heads are relatively
young, their expected response to the lowering of the basic deduction of the
inheritance tax may be of limited certainty and could change over time. We
therefore estimated the MNL model using the sample that contains households
whose heads are aged 60 or above as a robustness check. Instead of including
age group dummies as in Table 3, we include a dummy variable that equals 1
if the household head is aged 75 or above. Only the key regression results are
reported in terms of average marginal effects in Table 4 because the rest of the
results are broadly similar to those reported in Table 3 in terms of the sign and
significance of the marginal effects.31
As far as the implications of bequest motives for the behavioural response of
households to transfer taxation are concerned, Table 4 shows that the marginal
effects of having an altruistic and an exchange bequest motive are very similar
to those reported in Table 3 except that households with an exchange bequest
motive are now found to be more likely to respond to the tax reform by
reallocating the newly taxable amount of wealth to inter vivos transfers rather
than by reallocating it to their own consumption. These results suggest that
parents may increase their reliance on their children as they get older and that
their demand for their children’s services becomes more inelastic with respect
to the price of such services. Consequently, they become keener to avoid an
increase in their children’s tax bill by altering the timing of transfers in order
to ensure that they can rely on their children for, for example, old-age care.
Turning to the effects of saving motives, the marginal effect of the share
of precautionary saving becomes statistically insignificant if we restrict our
sample to older households, whereas it was found to be negatively associated
with the probability of making no adjustment to bequest plans when we used

30
Cox and Stark, 2005.
31
The full regression results are available from the author upon request.


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 Effect of the recent inheritance tax reform on bequest behaviour in Japan 65

TABLE 4
Robustness check results (household heads aged 60 or above only)
Consumption Inter vivos No adjustment
transfers

Bequest motives
(No or a weak bequest motive)
Altruistic bequest motive −0.022 0.210∗∗∗ −0.188∗∗
(0.070) (0.076) (0.085)
Exchange bequest motive 0.203 0.285∗∗ −0.489∗∗∗
(0.136) (0.139) (0.094)
Saving motives
Share of precautionary saving 0.014 −0.055 0.042
(0.111) (0.115) (0.131)
Share of retirement saving −0.036 0.047 −0.011
(0.143) (0.151) (0.168)

No. of observations 170 170 170

Pseudo R2 0.172 0.172 0.172
Note: The table shows marginal effects with standard errors in parentheses. ∗∗∗ , ∗∗ and ∗ denote statistical
significance at the 1 per cent, 5 per cent and 10 per cent levels. The other explanatory variables listed in
Table 2 are also included in the regression.
Source: Estimation based on data from the Survey on Households and Saving.

the full sample. We earlier argued that the latter could be partly due to the fact
that precautionary saving may be multipurpose and that it may be diverted
to inter vivos transfers for an exchange motive in the future. However, the
insignificant marginal effect of precautionary saving among relatively old
households suggests that households may not be able to afford to use their pre-
cautionary saving for different purposes if they are relatively advanced in age.
Recall that we removed from the estimation sample households that would
not make any adjustments to their bequest plans in response to the tax reform
because the size of their bequests is expected to be below the threshold of the
basic deduction of the inheritance tax. We did so mainly because their lack of
action was due simply to the fact that they would not be affected by the tax
reform in question and because the inclusion of these households is likely to
attenuate the effects of various bequest motives on households’ response to
wealth transfer taxation. However, in order to examine the sensitivity of our
results to the selection of the estimation sample, we re-estimated the MNL
model using the sample that includes such households. Only the key results are
presented in Table 5 because the rest of the results are again broadly similar to
those reported in Table 3.32

32
The full regression results are available from the author upon request.


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TABLE 5
Robustness check results (based on the full sample)
Consumption Inter vivos No adjustment
transfers

Bequest motives
(No or a weak bequest motive)
Altruistic bequest motive 0.003 0.126∗∗∗ −0.129∗∗∗
(0.023) (0.027) (0.032)
Exchange bequest motive 0.092 0.103∗ −0.196∗∗∗
(0.063) (0.057) (0.072)
Saving motives
Share of precautionary saving 0.069∗ 0.067∗ −0.137∗∗∗
(0.037) (0.039) (0.049)
Share of retirement saving 0.026 0.001 −0.026
(0.049) (0.050) (0.064)

No. of observations 937 937 937

Pseudo R2 0.090 0.090 0.090
Note: The table shows marginal effects with standard errors in parentheses. ∗∗∗ , ∗∗ and ∗ denote statistical
significance at the 1 per cent, 5 per cent and 10 per cent levels. The other explanatory variables listed in
Table 2 are also included in the regression.
Source: Estimation based on data from the Survey on Households and Saving.

A comparison of the results reported in Table 5 with those reported in

Table 3 seems to suggest that our regression results are relatively robust
to the selection of the sample. Regardless of the sample, we find that, in
comparison with households with no or a weak bequest motive, households
with an altruistic or an exchange bequest motive are less likely to make no
adjustments to their bequest plans in response to the tax reform and that
households with an altruistic bequest motive are more likely to engage in tax
avoidance behaviour by reallocating the newly taxable amount of wealth to
inter vivos transfers. Note, however, that the magnitude of the effects of the
bequest motives reported in Table 5 tends to be smaller than for those reported
in Table 3, as expected.
The results for the effect of having an exchange bequest motive change when
we change our estimation sample. We found earlier that having an exchange
bequest motive increases the probability of responding to the tax reform by
reallocating the newly taxable amount of wealth to consumption compared
with those with no or a weak bequest motive. By contrast, if we include in the
estimation sample households that would not make any adjustments to their
bequest plans because of the small size of their expected bequests, we find that
households with an exchange bequest motive are more likely to respond to
the reform by reallocating the newly taxable amount of wealth to inter vivos


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 Effect of the recent inheritance tax reform on bequest behaviour in Japan 67

transfers instead, as in the case of the results obtained when we restrict our
estimation sample to those aged 60 or above. One possible explanation for
this result is that, among households with an exchange bequest motive, less
wealthy households need to rely more on their children for, for example,
old-age care and, as a result, their demand for their children’s services is more
likely to be inelastic to the price of such services compared with their wealthier
counterparts.
As for the effect of saving motives, as in the case of our original
estimation, the share of precautionary saving is again found to be negatively
and significantly associated with the probability of not making any adjustments
in response to the lowering of the basic deduction of the inheritance tax.
On the other hand, if we include households with a limited amount of
wealth, precautionary saving also has a significant effect on the probability
of reallocating the newly taxable amount of wealth to consumption as well
as to inter vivos transfers. This suggests that the importance of precautionary
saving as a source of funds for making adjustments to their bequest plans in
response to the tax reform is greater for households with less wealth than for
wealthier households.

VI. Limitations
While the regression results are shown to be relatively robust, our analysis is
not without any caveats, largely because of the design of the survey we used
for the empirical analysis.
First, as in many other household surveys, the likely under-representation of
very wealthy households in the sample is one of the limitations of this research
as they are the main segment of the population that is affected by transfer
taxation. However, given that the recent reduction in the basic deduction of
the inheritance tax in Japan is likely to broaden the segment of the population
whose heirs would be subject to the inheritance tax, it is still worthwhile to
examine the effect of changes in the inheritance tax on the vast majority of the
population. Moreover, excluding households that expect their bequests to be
below the minimum taxable level from the estimation sample has helped us to
focus our analysis on the segment of the population that is more likely to be
affected by the change in inheritance tax policy.
Second, our analysis is based on households’ ‘expected’ response to the
anticipated change in inheritance tax policy. The actual behaviour of some
households may, of course, differ from what they said they would do. It is
therefore necessary to examine the effect of the revision of the inheritance tax
on the actual behaviour of households when data become available.
The rest of the limitations arise from the way the questionnaire was
designed, which prevented us from considering all possible responses to the
change in the inheritance tax policy. For instance, our analysis was limited


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to looking at the effect of various factors on the probability of households

opting for a particular response and we could not examine the magnitude of
households’ response to the tax reform. Similarly, because of the three specific
choices given to respondents when answering the first question (i.e. whether
or not they would make adjustments to their bequest plans so that the amount
of their bequests would fall below the threshold of the basic deduction), some
respondents might have chosen the answer of ‘not making adjustments’ even
though they may have been planning to make adjustments to some extent but
not to the extent that their bequests would fall below the threshold. Furthermore,
in the Survey on Households and Saving, respondents who answered that they
would make adjustments to their bequest plans were asked to select only one
out of four options (i.e. reallocate to consumption, reallocate to inter vivos
transfers, make charitable donations and by other means). However, these
alternatives are certainly not mutually exclusive and some households may
have been planning to respond to changes in transfer taxation using multiple
means to avoid taxes.
We acknowledge that the above limitations of the design of the
questionnaire may generate some measurement error and that we need to
interpret the results with caution. Despite these shortcomings, however, we
were able to show empirically that bequest motives play an important role in
determining the behavioural response of households to transfer taxation, an
area that has so far received relatively little attention in the empirical literature.

VII. Conclusions
By exploiting unique data on the household response to the expected reduction
in the basic deduction of the inheritance tax in Japan, this paper has made an
attempt to analyse the behavioural response of households to wealth transfer
taxation, with particular attention being paid to the implications of bequest and
saving motives for household behaviour.
Our regression results showed that bequest motives play a key role
in determining the behavioural response of households toward changes in
inheritance taxes, as emphasised in the theoretical literature. As expected,
parents with an altruistic bequest motive are more likely to avoid an increase
in their children’s tax liability by making earlier transfers of wealth through
inter vivos transfers in response to the reduction in the basic deduction of the
inheritance tax than parents with no or a weak bequest motive. By contrast,
households with an exchange bequest motive are more likely to engage in tax
avoidance behaviour by reallocating the newly taxable amount of wealth to
their own consumption, suggesting that their demand for services from their
children is relatively elastic with respect to the price of these services, although
the regression results suggest that they exhibit a similar response to those with
an altruistic bequest motive in some cases. As for the effect of saving motives,


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the share of precautionary saving is found to be negatively associated with

the probability of making no adjustment to bequest plans. However, the effect
of precautionary saving becomes statistically insignificant if we restrict our
sample to those households whose heads are aged 60 or above.
The findings of this paper have a number of important policy implications.
First, our finding that relatively few households plan to reallocate the newly
taxable amount of wealth to inter vivos transfers in response to the lowering
of the basic deduction of the inheritance tax implies that bequest recipients
will have to pay more inheritance taxes as a result of the tax change, which
will lower their after-tax inheritances and reduce the extent to which wealth is
passed on from generation to generation. To the extent that one of the goals of
inheritance taxes is to prevent the persistence of inequality across generations,
our finding implies that this goal will be achieved, at least to some extent,
by the revision to inheritance tax policy. Nevertheless, this would depend
critically on whether the likelihood of wealthier households reallocating the
newly taxable amount of wealth to inter vivos transfers is greater than that of
the rest of the population. While our estimation results do not indicate such
a tendency, further analysis with more detailed data is required to reach a
definitive conclusion.
Second, the fact that relatively few households plan to reallocate the newly
taxable amount of wealth to consumption or to inter vivos transfers in response
to the lowering of the basic deduction of the inheritance tax also implies that
this tax change, together with the creation of gift tax exemptions and the
enhancement of the advantaged nature of the gift tax relative to the inheritance
tax, will not necessarily have a very large stimulative effect on the economy,
contrary to what the Japanese government may be hoping for. Given the
relatively high share of saving for retirement and/or precautionary purposes in
Japan, unless people can feel more secure about their lives after retirement, they
are unlikely to reallocate their wealth to their own consumption or inter vivos
transfers. Hence, expanding social safety nets and/or reducing people’s sense of
insecurity might be a better way of stimulating consumption and the economy
as a whole than tinkering with wealth transfer taxes.

Supporting information
Additional supporting information may be found online in the Supporting
Information section at the end of the article.
• Data appendix

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