Cuurent rate of tax on funds?

[RetireJapan]

Yes, but couldn’t things be done by just having a lower capital gains tax rate? That’s my key point.

If one were able to keep 90 yen of any 100 yen profit made, instead of just 80 yen, that would have incentivized people invest more too. The capital gain tax need not be effectively 0%.

As a result, I will personally pay much less capital gains tax. Personally that’s nice for me… but aren’t I supposed to pay my fair share? Wouldn’t that have been simpler and better for tax revenues? I don’t know why these tradeoffs were selected.

It's to limit the amount of benefit to wealthier people. The NISA allowances from next year are more than most of the population could hope to save up. People with hundreds of oku would receive limited benefit from NISA, but much more from a lower capital gains tax. It's a political issue, as Komeito tries to cultivate an everyman image.

[adamu]

People with hundreds of oku would receive limited benefit from NISA

Probably because they're tax resident in Singapore

[Tkydon]

Yes, but couldn’t things be done by just having a lower capital gains tax rate? That’s my key point.

If one were able to keep 90 yen of any 100 yen profit made, instead of just 80 yen, that would have incentivized people invest more too. The capital gain tax need not be effectively 0%.

As a result, I will personally pay much less capital gains tax. Personally that’s nice for me… but aren’t I supposed to pay my fair share? Wouldn’t that have been simpler and better for tax revenues? I don’t know why these tradeoffs were selected.

Lowering the CGT would disproportionately benefit the super rich and corporations, and would definitely reduce the tax revenues, which would have to be made up somewhere else.

[TokyoWart]

Yes, but couldn’t things be done by just having a lower capital gains tax rate? That’s my key point.

If one were able to keep 90 yen of any 100 yen profit made, instead of just 80 yen, that would have incentivized people invest more too. The capital gain tax need not be effectively 0%.

As a result, I will personally pay much less capital gains tax. Personally that’s nice for me… but aren’t I supposed to pay my fair share? Wouldn’t that have been simpler and better for tax revenues? I don’t know why these tradeoffs were selected.

The capital gain rate in Japan used to be 10%. I remember scrambling to do some "tax gain harvesting" when it was about to adjust to the 20% which became 20.315% with the reconstruction tax. Before that there was actually an option to pay 1% of the proceeds of a stock sale instead of some % of realized gain so the trend recently has been for higher capital gain tax rates.

[sutebayashi]

Lowering the CGT would disproportionately benefit the super rich and corporations, and would definitely reduce the tax revenues, which would have to be made up somewhere else.

I am imagining the NISA changes will result in reduced tax revenues, and thus was surprised that there seemed to be no obvious debate of what ought be done about that by the government panel.

The degree to which those revenues do decrease will I guess depend Toma good degree on how much the super rich and corporations bear the burden of the tax currently.

The capital gain rate in Japan used to be 10%…. the trend recently has been for higher capital gain tax rates.

Heh, yes I see it was only around 2014 that it was 10%. So they pushed it to 20%, but now it is to be effectively 0% for most people from next year….

[RetireJapan]

NISA and iDeCo uptake rates are pretty terrible, many people with accounts don't even use them...

It would be interesting to work out the actual tax revenue hit.

[TokyoBoglehead]

As I said, 28tn yen, about 200bn $ in assets.
About 17mn NISA accounts, so 1-2mn yen per account.
Taking 3-5% return for the total would lead to $8bn in gains, and 20% of that 1.6bn per year. However,
(A) each set of accounts per individual would need to clear 200k yen in a year, so the majority of accounts under 2m¥ would only get there in some years
(B) many of the funds in the NISA would usually end up in saving accounts instead of the securities market.

So, without anything but gut feeling, I’d say tax revenue loss should be less that 10-20% of the max, say 150-300mn $ per year. Not much for getting millions of people into investing and utilizing their savings more effectively.

As of 2021 polling 80% of Japanese people said investing was not necessary. That highlights a deeper issue that a "simplified" system will not address.

Furthermore look at Furusato Nozei, it's very complicated yet has a high use rate.

The root issue here is deeper societal and cultural scaring from the previous bubble. We cannot exaggerate how deviating it was.

[sutebayashi]

As I said, 28tn yen, about 200bn $ in assets.

We might stick with yen, since this is Japanese yen tax revenues we are talking.

I could not find very clear figures for existing tax revenues, but one article I saw suggested 2019 revenues for this type of tax came in around 5.7 trillion yen.

About 17mn NISA accounts, so 1-2mn yen per account.
Taking 3-5% return for the total would lead to $8bn in gains, and 20% of that 1.6bn per year.

Small existing NISA accounts are not from where I think revenues will be lost, relative to now.

It’s the richer investors who have already maxed out their existing NISA, and are also paying tax on their taxable investments, that should be able to reduce the amount of tax they pay by making use of the extra NISA tax free limits.

For example currently I do an annual portfolio rebalance, sometimes selling profitable investments from my taxable account and I pay tax on that. I have used my iDeCo switching to the extent possible to do my rebalancing, but when that is not enough, I suck it up and sell from my taxable account and pay the tax.

From next year I expect to sell some taxable account assets and purchase 2.4 million of the 2024 NISA tax free allocation when I do a rebalance in January. Then I will not pay tax on those NISA assets any longer.

Perhaps there might be some temporary positive effects on tax revenues to the extent that such people do realize profits in taxable accounts initially (many may just invest fresh money), but at the same time the base of taxable assets will decrease versus what it would have been as the new NISA accounts are built up, with negative effects on revenues.

So effectively I see this as many people’s fair share of this tax being reduced to a “no share”, and even richer people getting to pay less too. It’s a much narrower tax base.

These days the government is talking about finding / securing extra revenues for current priorities, while they have just made changes that might reduce that 5 odd trillion yen of revenues from investment taxes. Then are they going to propose to hike the consumption tax to plug the hole?

But who knows, perhaps tax revenues in other forms could increase as a result of the NISA reforms… it’s hard to say. Many factors could confound attempts to determine the effects I suppose.

[TokyoWart]

The capital gain rate in Japan used to be 10%…. the trend recently has been for higher capital gain tax rates.

Heh, yes I see it was only around 2014 that it was 10%. So they pushed it to 20%, but now it is to be effectively 0% for most people from next year….

How is the capital gains tax effectively 0%? The total amount of stock held in NISA accounts is tiny as a fraction of total stock ownership in Japan.

[Tkydon]

Heh, yes I see it was only around 2014 that it was 10%. So they pushed it to 20%, but now it is to be effectively 0% for most people from next year….

Capital Gains Tax is far far broader than just the reduction in tax revenue from Capital Gains due to NISA and covers all:
Commodity Futures Trading
Trusts
Real Estate Short-Term and Long-Term Capital Gains
Other Property Assets, fixed and movable
Stocks and Shares
Public and Corporate Bonds
and so on...


Invested funds / assets are not subject to capital gains tax until those assets are transferred / sold / disposed of, so even if the products were purchased in a regular account, they would not be liable for CGT until they are disposed of, probably in retirement.

You get the tax benefit in NISA as the funds were already subjected to (probably higher) marginal rate of income tax at the time when the funds were earned and invested.

On the other hand, funds invested in Corporate Defined Contribution (Japan 401k), iDECO, and other Pension accounts are Tax Deductable (Tax Free) on the way in, and then liable for income tax on distribution in retirement, but at a low aggregate rate of tax with large tax deductions...