Working Paper（26-022E）How Large Are the Effects of Inheritance Taxation? Lessons from Japan

Japan taxes inheritances more heavily than almost any other advanced economy: revenue is about 0.5 percent of GDP and nearly 10 percent of decedents leave taxable estates. We study reform in an overlapping generations model with idiosyncratic earnings risk, voluntary and accidental bequests, and intergenerational transmission of earnings ability, calibrated to Japanese aggregates, earnings inequality, and the distribution of taxable estates. Because Japan is the world’s largest net foreign creditor, we consider both a small open economy and a closed economy. Eliminating the tax raises household net worth by 15.3 percent in the small open economy, where the additional saving is held abroad, and by 1.8 percent in the closed economy, where domestic capital rises by 2.2 percent. An economy recalibrated without a voluntary bequest motive implies that about two-thirds of the benchmark bequest flow is accidental. Raising the exemption to the current U.S. level lowers the top one percent’s wealth share in both economies but lowers ex-ante welfare in the closed economy, where fewer than one newborn in five gains. Under the 2070 mortality projections the responses are smaller throughout.

Keywords: Inheritance taxation, Bequests, Reform, Wealth Inequality, Japan

JEL Classification: D31; E21; H24; J14