effective interest rate is constant and the price fall is large, too, the movement opposite to that shown in the figure

Transcription

1 Discounted present value applicable, there may be cases in which it will be more profitable to sell the assets in a quite early time (first year) if the inflation rate is high. Reversely, when the effective interest rate is constant and the price fall is large, too, the movement opposite to that shown in the figure above may develop and there may be cases in which it will be more profitable to sell the assets in an early time (12th year) (refer to Table III-23). As it is clear from what are discussed above, it may be said that when the price increase rate fluctuates considerably, there is a strong possibility of the "tax shelter effects" getting high. IV. Tax Reform and Capital Cost of Housing Investment So far the policy effects of the existing housing investment promoting measures, the comparison of the capital cost of construction of owner occupied houses with that of rental housing construction, the effects of changes in the inflation rate and the "tax shelter effects" for the transaction of rental houses have been examined. This section examines the effects of the new policy means and tax-system

2 related measures to promote housing construction by households on the capital cost by income class. The following new tax-system-related measures may be considered. First, for construction of owner occupied houses, the following measures may be a possibility. (i) Expansion of the existing tax credit system for construction of owner occupied houses (ii) A tax credit of 1% of construction cost regardless of financing means (iii) Introduction of a U.S. type tax system (income deduction for the interest rate and property taxes, and a comprehensive taxation on the interest income) For rental housing construction, it is proposed (iv) To make income deduction for 10% of the rent income. Additionally, as discussed in Section II, from the standpoint of "fairness" and "neutrality" of the tax system, the tax system applicable to construction of owner occupied houses use may be brought closer to that applicable to rental housing construction. (v) With the existing housing investment promoting measures (the "tax credit" for construction of owner occupied houses, the "extra depreciation" for rental housing construction) maintained, a separate taxation (10%) will be applied to the imputed rent and rent. Finally, as changes in the taxation related to the interest income will cause changes in the opportunity cost of housing investment with the own funds of housing owners, there will be great effects on the capital cost, too. Therefore, -101-

3 the effects of the following tax system reform proposals on the capital cost of housing construction by households will be examined. (vi) For the interest income, a. Low rate separate taxation (10%) b. Uniform separate taxation (15%) c. Three-step separate taxation (15, 25, 35% ) d. Comprehensive taxation A. New Preferential Tax Treatments for Construction of Owner Occupied Houses (Expansion of "tax credit" for construction of owner occupied houses) The two proposals to expand the existing "tax credit" are as below. (i)the existing tax credit for 1% (0.5% of the loan balance from the Public Loan Corporation) of the mortgage loan balance for the first three years is to be modified to a tax credit of 2% of the mortgage loan balance for the initial five years. (ii) Regardless of the financing means, a tax credit of 1% of the construction cost is allowed for the first three years. The existing "tax credit system" is to be abolished. Then, the effects of the tax credit may be modifided as below, respectively. (1-Q ) G A =0.02 { -1} - Q ( -1) i- (1-Q ) { e 5( - ) -1} - Q ( -1)

4 Q =, Q = -1-1 G B =0.01 = , The actual measurements of the effects give the results as shown in Table IV-1 and Fig.IV-2. That is, (i) An expansion of the tax credit reduces the capital cost of construction of owner occupied houses by 0.13 to 0.23 percent points whereas the tax credit of 1% of the construction cost decreases the capital cost by 0.11 to 0.19 percent points. Although the difference between the two is small, the latter has slightly smaller capital cost reducing effects. (ii) As for the movement of the capital cost by income class, the capital cost for the income classes with an annual income of 10 million yen or less moves downward. As a result, as far as construction of owner occupied houses is concerned, the lower income classes get a lower capital cost when compared with the income classes with an annual income of 10 million yen or more. (iii)if a "tax credit" amounts to 1% of the construction cost, the capital cost of the standard case moves downward in parallel. Therefore, there will be no changes in the capital cost by income class. The same may be said when a "tax credit" of 1% of the construction cost is applied to rental housing construction. (Figure IV- 2 - (b)) presents the capital cost of such a case

5 Table IV- 1 Effects of New Policy Measures to Promote Housing Construction Standard case Expansion of tax deductions (2% for five years) Expansion of tax deductions (1% of construction costs) 10% income deduction for rent (rental house) Introduction of the U.S. tax system (I) Introduction of the U.S. tax system (II) Uniform treatment of Owner occupied and rental houses under the tax system Capital costs Owner occupied houses Wooden Non-wooden Rental houses Wooden Non-wooden Effective marginal tax rate Owner occupied houses Wooden Non-wooden Rental houses Wooden Non-wooden Notes: The introduction of the U.S. tax system (I) means a simultaneous application of the Japanese guidance policy finance and tax deductions. The introduction of the U.S. tax system (II) means to abolish the Japanese quidance policy finance and tax deductions

6 Figure IV- 2 New Tax Measures for Specific Construction (a) Case of expanding tax deductions (b) Case of 1% "tax deduction" of construction costs -105-

7 (c) Introduction of the U.S. tax system (I) (d) Introduction of the U.S. tax system (II) -106-

8 (Introduction of a U.S. type tax system) In the U.S., the tax system related to construction of owner occupied houses consists of (i)income deduction for the interest cost and property taxes (ii) General taxation on the interest income In applying this U.S. tax system to Japan, let us examine the two cases. Case I: Case in which the present policy financing and the "tax credit" are maintained. Case II: Case in which the present policy financing and the "tax credit" are excluded. Conducting measurements as to these two cases, the following findings are made. (1) The reduction in the capital cost of Case I is larger when compared with the case of "expansion of tax credit" and the case of "tax credit of 1% of the construction cost" by as much as 0.87 percent points. In Case II, the capital cost decreases by 0.14 to 0.19 percent points. The results of Case II indicates, as the U.S. type tax system was applied to Japan, that the capital cost of housing investment (construction of owner occupied houses) is far lower than that under the present tax system in Japan. (ii) As for the movement of the capital cost by income class, although the capital cost is reduced for all the income classes, the higher income classes get a larger reduction in the capital cost. Thus, the U.S. type tax system may be said more "favorable to the rich" than the Japanese tax system as far as construction of owner occupied houses is -107-

9 concerned. In Case I, the capital cost gets somewhat lower for the income classes up to an annual income of 10 million yen, the higher income classes get even a lower capital cost (refer to Fig.IV- 2 - (c)(d)). (iii) Comparing with the capital cost of rental housing construction by households, the capital cost of construction of owner occupied houses is considerably lower. The U.S. type tax system may be said, in this sense, inclined to "promote construction of owner occupied houses." B. New Preferential Tax Treatments for Rental Housing Construction In order to promote rental housing construction by household, it has been proposed to make income deduction for 10% of the rent. This proposal is roughly equivalent to reduce the marginal tax rate on the rent by 10%. Then, the capital cost of rental housing construction will decrease considerably (1.07 to 1.08 percent points) to be almost at the same level as the capital cost of construction of owner occupied houses of the standard case. Comparing with the standard case, the higher income classes with an annual income of 10 million yen or less get somewhat a large reduction in the capital cost. Therefore, the higher income classes get more incentives to construct rental houses. Figure IV-3- (b) shows the capital cost by income class for the case of the "expansion of the tax credit" for construction of owner occupied houses, and for the case of the "income deduction of 10% of the rent" for rental housing -108-

10 Figure IV- 3 New Tax Measures to Promote Rental Housing Construction by Household (a) Case of 10% income deduction of rent (b) Case 10% income deduction for rent and "tax deduction expansion" for Owner occupied houses -109-

11 construction. The figure clearly shows that construction of owner occupied houses is more profitable for the income classes with an annual income of 10 million yen or less and that rental housing construction is more profitable for the income classes with an annual income of 10 million yen or more. C. Equal Tax Treatment of Rental Housing Construction and Construction of Owner Occupied Houses by the Household The capital cost of rental housing construction and that of construction of owner occupied houses by households will be made the same by bringing the treatment of construction of owner occupied houses under the tax system closer to that of rental housing construction. Then, (i) A separate taxation of 10% will be applied to the imputed rent and rent. (ii)the income deduction for the depreciation cost (including the "extra depreciation system") and interest cost, etc. will be applied to construction of owner occupied houses. (iii) To rental housing construction, the "tax credit" system applicable to construction of owner occupied houses will be applied. Then, the capital cost of construction of owner occupied houses and that of rental housing construction will be reduced, comparing with the standard case, by 0.13 to 0.18 percent points and by 0.24 to 0.33 percent points, respectively. That especially the capital cost of rental -110-

12 housing construction decreases considerably is due to an application of a 10% separate tax. For construction of owner occupied houses, too, the capital cost decreases as while a tax is levied on the imputed rent, an income deduction is made for the depreciation and interest costs. By income class, the higher income classes get a larger reduction in the capital cost. An application of a 10% separate tax is "favorable to the rich" just as the separate taxation related to interest and dividend income (Fig.IV-4). Figure IV- 4 Case of uniform treatment of rental and Owner occupied housing construction under the tax system -111-

13 Incidentally the capital cost is from 3.03 to 3.06% which is considerably lower than the effective interest rate of 3.4%. Therefore, the effective marginal tax rate is negative, though slightly (- 0.8% ). This is meant that subsidies are provided for housing construction by households, regardless of own or rental houses. D. Effects of Tax System Reform Related to the Interest Income For the interest income, the following four reform plans are considered. (i) Low rate separate taxation (10%, the national tax only, however) (ii) Uniform separate taxation (15%, ibid.) (iii) Three- step separate taxation (15, %, ibid.) (iv) Comprehensive taxation The then applicable marginal tax rates by income class are as presented in Table IV-5. Now, if the four reform plans as discussed above are carried out, the following facts may be observed as to the changes in the capital cost (refer to Table IV-6 and Fig.IV-7). (i) A decrease in the capital cost is larger in the order of uniform separate taxation, three-step separate taxation, comprehensive taxation and low rate separate taxation. An increase in the effective marginal tax rate is also larger in the same order

14 Table IV- 5 Marginal Tax Rate on the Interest Income of Households (Case of Intensified Taxation) Income class Low rate separate taxation Uniform separate taxation Three- step taxation General taxation (1,000 yen) 0-1,000 1,000-1,500 1,500-2,000 2,000-2,500 2,500-3,000 3,000-3,500 3,500-4,000 4,000-4,500 4,500-5,000 5,000-5,500 5,500-6,000 6,000-6,500 6,500-7,000 7,000-7,500 7,500-8,000 8,000-9,000 9,000-12,500 12,500-15,000 15, (ii) In the case of uniform separate taxation, comparing with the standard case, the capital cost decreases more for the income classes with an annual income of 10 million yen or less, and the capital cost rather increases for the income classes with an annual income of 10 million yen or more. (iii)in the case of low rate separate taxation, comparing with the standard case, although the capital cost slightly decreases for the income classes with an annual income of 10 million yen or less, it hardly changes for the income classes -113-

15 Table IV- 6 Effects of Intensification of Taxation on Savings Standard case Low rate and separate taxation case Uniform and separate taxation case Three-step taxation case General taxation case Capital costs Owner occupied houses Wooden Non-wooden Rental houses Wooden Non-wooden Effective marginal tax rate Owner occupied houses Wooden Non-wooden Rental houses Wooden Non-wooden with an annual income of 10 million yen or more. (iv) In the case of three- step separate taxation and comprehensive taxation, an intermediate pattern between -114-

16 Figure IV- 7 Effects on Capital Costs of Intensification of Interest Income Taxation (a) Low rate and separate case (b) Uniform and separate case -115-

17 (c) Case of three- step separate taxation (d) Case of general taxation -116-

18 uniform separate taxation and low rate separate taxation is observed, but three-step separate taxation results in somewhat a larger reduction in the capital cost for the higher income classes. (v) Comparing construction of owner occupied houses and rental housing construction, the capital cost of rental housing construction decreases more. This is thought due to an effect of the reduction in the discount rate for housing investment with own funds enlarging the discounted present value of the depreciation cost. For the case of comprehensive taxation, whereas the capital cost decreases by 0.24 percent points for construction of owner occupied houses, it decreases by 0.27 to 0.28 percent points for rental housing construction. In any case, as an intensification of taxation on the interest cost reduces the opportunity cost of housing investment with own funds, the capital cost decreases. Although uniform separate taxation is disadvantageous to the low and middle income classes in the formation of financial assets, it is relatively advantageous for the formation of real assets. On the other hand, it should be noticed, it works to be disadvantageous to the higher income classes for the formation of real assets. V. Changes in Capital Cost, Housing Investment and Household Saving Rates In the preceding section, the effects on the capital cost of changes in the tax policies related to housing investment -117-

19 and household saving were examined. Next, let us examine (1) the effects on housing investment of changes in the capital cost and (2) the effects on housing saving ratio of an intensification of taxation on household saving. Of the above, the effects of changes in the capital cost for rental housing construction by the real estate industry on investment activities were discussed in the previous paper. In this paper, therefore, the effects of changes in the capital cost of housing construction, especially construction of owner occupied houses, on the housing supply by the household sector are studied. A. Effects of Changes in the Capital Cost on Housing Investment by Households In order to study, using cross section data, the effects of changes in the capital cost of housing investment on housing investment by households, the following data is needed. (i) Capital cost by income class (ii) Housing investment by income class (excluding land) (i) has been already calculated. For (ii), proper data is extremely limited. Although the following three statistics are available in the "Survey on Saving Trend" and the data in the "Household Economy Survey Annual Report" is available, but each has some problems. (1) "Real investment" in the "Survey on Saving Trend" (2)"Housing investment for households" in the "Survey on Saving Trend" (3)"Debt for house and land" in the form of flow in the -118-

20 "Survey on Saving Trend" (4)"Purchase of assets" in the "Household Economy Survey Annual Report" As (4) includes "purchase of land, house, superficies and good will", it is not in the domain of the analysis covered in this study. As (1) is defined as "investment in land and house, and capital gains", the amount of investment is small. Also, it is not proper as land is included. (2) is most proper for the analysis in this study as the data classified into investment in land and that in house is available. The problem is, however, that the income classes are divided only to six classes. For (3), only the amount of debt (flow) for real investment is available. The above four groups of data are all on the investment in construction of owner occupied houses by households, and rental housing construction is classified into an investment in "business assets". The amount of investment in "business assets" is minimum, however, and it is difficult to cover it in the analysis. As there are problems in the availability of data as described above, this paper analyzes only the relationship between construction of owner occupied houses by households, especially workers' households, and the capital cost. As the amount of housing investment by income class, the three groups of data from the "Survey on Saving Trend" were used. In other words, with the data of "real investment" in the "Survey on Saving Trend" as a base, the ratio of own funds -119-

21 and debt was adjusted, using the data of "housing investment for households". For in the latter, not only the housing investment is classified into land and house, but also the amount of debt (debt for house and land) is available. Additionally, the data of "debt for land and house" was used to convert the data into 19 classes. The housing investment by income class after the adjustment as discussed above is presented in Table III-6 and Fig.V-1. In addition, the housing investment and the capital cost are shown in Fig.V-2. The equation to show the relationship between the housing investment and the capital cost ( P 0 ) of construction of owner occupied houses as calculated is I = f ( P 0, Y ) Here, Y represents the annual income. This equation was logarithmically converted to make estimation to get the results below. Wooden: logi = logp logy (-0.23) (-1.76) (10.36) R 2 =0.896, S.E= Non-Wooden: logi = logp logy (-0.12) (-1.63) (9.85) R 2 =0.894, S.E= The coefficient of the capital cost is significant at 91% for wooden and at 88% for non-wooden. In other words, an increase in the capital cost works to reduce housing investment. The elasticity is to What should be noticed here is that an intensification of taxation on the interest income decreases the capital cost of -120-

22 construction of owner occupied houses by (1) 5.3% (wooden) or 5.4% (non-wooden) (low rate separate taxation), (2) 9.2 or 9.5% (uniform separate taxation), (3) 8.9% or 8.7% (threestep taxation) or (4) 7.6% or 7.4% (general taxation). As a result, housing investment in a long run increase by (1) 6.3 to 6.8%, (2) 12.7 to 13.5%, (3) 8.9 to 9.6% or (4) 10.4 to 11.1%. Even if the short-run effects are about a third of the above, a considerable increase in housing investment can be expected. The effects of this intensification of taxation on housing investment give almost the same effects as housing investment promoting taxation measures such as an "expansion of tax Figure V- 1 Housing Investment by Income Class -121-

23 Figure V- 2 Housing Investment by Income Class and Capital Costs (a) Wooden (b) Non- wooden -122-

24 credit". Clearly, an intensification of taxation on the interest income works to encourage the shift from the holding of financial assets to the holding of real assets by households. By the way, this increase in the holding of real assets becomes a factor to raise the household saving ratio if it is financed with own funds. On the other hand, a decrease in the holding of financial assets works to decrease the household saving ratio. Thus, let us examine if an intensification of taxation on the interest income works to really decrease the ratio of holding financial assets ( = hrereinafter to be referred to as the ratio of financial assets holding by households). B. Effects on Household Saving Rates of an Intensification of Taxation on Savings In order to examine, using cross section data, the effects of an intensification of taxation on savings on the household saving ratio, the following three groups of data are needed. (i) Household savings by income class (ii) Household disposable income by income class (iii)after- tax profit ratio based on financial assets holding by income class For (i), the data is available from the "Survey on Saving Trend". The savings (in flow) are defined there as below. Savings = Increase in household financial assets - Increase in household debt + Real investment (land, house) This definition of savings is different from that in the "National Accounts" in that (1) land is included in the real -123-

25 investment and (2) capital gains resulting from financial assets holding are included. For (ii), too, the disposable income is available from the "Survey on Saving Trend". There, disposable income is defined as disposable income = annual income - (income tax + residential tax + social insurance expenses.) In the "National Accounts" (1) the imputed rent and medical expenses not personally paid are classified into the consumption expenses whereas (2) fees, gifts and remittances not included in the tax burden are classified into the ordinary transfer, but not included in the consumption expenses. As (1) is generally larger than (2), the household saving ratio in the "Survey on Saving Trend" is higher than that in the "National Accounts". By dividing the savings by income class thus obtained by the disposable income by income class, the saving ratio by income class can be obtained. Changes in the capital cost(% ) Housing investment changing rate Debt Changing rate Changes in the household saving ratio (1)Low rate separate taxation (2)Uniform separate taxation (3)Three- step separate taxation (4)Comprehensive taxation Note: As an elasticity of housing investment to the capital cost, 1.26 is used. (Effects through the changes in real investment) By the way, the household saving ratio naturally contains real investment. Real investment is thought, as examined -124-

26 earlier, rather to get direct effects of the changes in the capital cost resulting from an intensification of taxation on the savings. Also, about 90% of an increase in debt" is accounted for by an increase in debt for housing investment (based on the "Survey on Saving Trend"). In order to examine the effects of an intensification of taxation on the savings on the household saving ratio, it may be necessary to consider the following routes. Intensification (1) Changes in the Changes in of taxation on after-tax rate of household Changes in the savings return resulting financial the housefrom financial assets holding hold assets holding saving ratio (2) Changes in the Changes in capital cost real investment (house) Changes in household debt The effects through (2) are easy to examine as they were investigated in the preceding section. If the household debt is assumed to be proportional to the housing investment, changes in the household saving ratio may be expressed by the following equation. I (1-l ) ( I - Y Y ) Here, l represents the debt ratio, Y, I the disposable income housing investment of the standard case, Y and I and the disposable income and housing investment, respectively after the change in taxation on the interest income. As a result of an intensification of taxation on the interest income, as the disposable income changes, Y takes a value different from that of Y. The value of I needs to be -125-

27 adjusted for the value to represent the entire workers' households from that of households with a house and land. According to the calculation with the adjustment as stated above, an increase in the household saving ratio through the changes in the capital cost amounts to 0.2 to 0.5 percent points. (Changes in financial saving rates of household) What is left is the effects via the changes in the after-tax rate of return resulting from household financial assets holding. In order to examine the effects through the route of (1), as a variable to be explained, Increase in financial assets holding Disposable income ( = Financial saving ratio of households) = SF YD may be taken up, and as explaining variable, the after- tax rate of return by income class ( S ) of (iii) may be used. It may be also reasonable to add the financial assets balance ( FW) of the preceding period to the explaining variables. Therefore, the equation we intends to estimate is SF =f ( S, FW-1) YD The after- tax profit ratio resulting from financial assets holding may be defined as below. S = + (1- ) +γ (1-Z )g +(1- )d + +γ=1 : A weighted average interest rate on deposits and securities g : Stock price rising rate (Tokyo Stock Exchange weighted average stock price increase rate) d : Dividend profit ratio ( = Total of dividends of -126-

28 companies on the stock exchange market/total of market prices) : Marginal tax rate on the interest income by income class Z : Marginal tax rate on the capital gains ( = 0.55% of security transaction tax) : Marginal tax rate on the dividend income by income class : Tax- exempt savings balance/financial assets holding balance : Taxable savings balance/financial assets holding balance γ : (Stock + Stock trust funds balance)/financial assets holding balance That the after-tax rate of return resulting from the holding of financial assets differs for different income classes is due to that (1). the type and weight of financial assets held by different income classes are different and (2) the applicable marginal tax rate on the interest income and dividend income is different. As for the holding of financial assets by the household sector, a hypothesis that the after-tax rate of return from all financial assets can be represented by the after-tax rate of return for secure assets can a possibility, in view of differences in the applicable tax rate and risk. For instance, if the interest rate on short-term government securities is represented by and the tax rate by, then the after-tax profit ratio from all financial assets can be represented by S = (1- ) -127-

29 In this study, however, the measurement method as discussed earlier was employed, paying attention that the mode of financial assets holding and the marginal tax rate differ in reality by income class. This measurement method is based on "Miller's equilibrium", i.e., on the idea of "isolated equilibrium" that the equilibrium and profit ratio of individual financial assets differ as the income classes of holding them are different according to differences in the type of financial assets. It should be noticed here that this "Miller's equilibrium" agrees with the hypothesis that the capital cost differs according to the financing means. The results of the estimate made using the variables (Table V - 3) explained so far may be shown by the following equation. SF = S FW YD YD (-1.60) (1.50) (2.10) =0.442, D.W.=1.88, S.E.=0.042 In this equation, the after-tax rate of return is positive to the financial saving ratio of households with a significance (significant with 85% ). The elasticity is As t - value for S is somewhat low in this equation, an increase in the debt ( ΔB )was added to the explaining variables in view of that the saving ratio tends to decline for households with a larger increase in debt. SF = S YD (-1.74) (1.73) (1.81) F W -1 ΔB YD YD (-1.21) =0.458, D.W.=1.84, S.E.=

30 Table V- 3 Financial Saving Ratio of Households and After- Tax Rate of Return (1,000 yen) Income class (1,000 yen) 0-1,000 1,000-1,500 1,500-2,000 2,000-2,500 2,500-3,000 3,000-3,500 3,500-4,000 4,000-4,500 4,500-5,000 5,000-5,500 5,500-6,000 6,000-6,500 6,500-7,000 7,000-7,500 7,500-8,000 8,000-9,000 9,000-12,500 12,500-15,000 15,000- Increase in financial assets Disposable income ,112.7 Household financial asset/12 ( % ) Interest rate on deposits and securities ( % ) Note: g = and d = which are common to all the income classes. As a result, t - value of becomes more significant, and the elasticity is 1.88 (significant at 90% ). Of the two measurement equations, let us use the first equation to examine changes in the financial saving ratio as a result of a tax system reform. Now, the following equation is established. Δ ( SF )= SF - SF = (S -S ) YD YD YD From the table, it may be said that an intensification of taxation on the savings reduces the household saving ratio by 1.5 to 2.3 percent points. Combining the results obtained above and an increase in the household saving ratio caused by a decrease in the capital cost, it may be said that the household saving ratio may be -129-

31 reduced by (1) 1.3 percent points (low rate separate taxation) (2) 1.9 percent points (uniform separate taxation) (3) 1.9 percent points (three- step separate taxation) (4) 0.5 percent points (capital gains) due to an intensification of taxation on the savings. Table Changes in the Household Saving Ratio due to an Intensification of Taxation on the Savings Low rate separate taxation Uniform separate taxation Three-step separate taxation Comprehensive taxation Taxation on Capital g ains Changing rate of the Changes in Changing rate of Changes in Changes in capital cost householdrate of household household (% ) real savings ( % point return of financial financial savings ( % point saving ratio ( % point differences) assets differen- differen- ( % ) ces) ces) Note: As an elasticity of housing investment for the capital cost, 1.26 is used. Also, as an elasticity of financial assets increment for the profit ratio of financial assets, 1.63 is used. (Comparison with past studies) The empirical studies on the relationship between the tax system for interest rate and savings on one hand and household saving ratio on the other hand have concluded that it is difficult to think that changes in the tax system for interest rate and savings are giving significant effects to the household saving ratio and that especially changes in the -130-

32 tax system have not had effects on the level of the household saving ratio, even though they have affected the shift between financial assets. The measurements in this paper show results different from the conventional established theories. They have significant positive effects upon the household saving ratio in the form of financial assets holding, and moreover the elasticity of the household saving ratio to the after-tax profit ratio is a large value close to 1. Comparing with the conventional studies, this study may be said to have brought about different results because (1) The household financial saving ratio by income class was used as a variable to be explained. (2) The after- tax rate of return by income class was calculated after the marginal tax rate by income class was calculated. (1) is very important in view of that a decrease in the interest rate and/or an intensification of taxation on savings reduces the capital cost of housing investment, and in view of an existence of the routes to increase the household real saving ratio. At the same time, it should not be forgotten that the debt incurring behavior of households is strongly related to housing investment. As for (2), the past studies appear to be questionable in that without calculating the marginal tax rate by income class with respect to the interest and dividend income, the after-tax rate of return was calculated as an approximate value. Of course, it is difficult to determine theoretically if an increase in the after-tax rate of return raises the household financial saving ratio. Because the interest rate -131-

33 is a relative price related to the selection of present or future consumption, and its change has both substituttion and income effects. In order that an increase in the after-tax rate of return causes an increase in the household financial saving ratio, the substitution elasticity between present and future consumption needs to be considerably high. This may be demonstrated using a simple life cycle model. Let us assume that an individual lives for two periods, that he/she works in the first period to get money, and retires in the second period. Let us also assume that the individual saves and lends money in the first period as a preparation for the second period. A proportional tax of is to be levied on the profit ratio ( r )of the money lent. Then, the budget constraint for him/her is C 2 C r (1- ) = Under this condition, the individual behaves to maximize the benefit of consumption. MAX u ( C 1, C 2) Also, the price ( P ) of the consumption in the second period may be expressed as 1 P = 1+r (1- ) Then Slutsky's equation is C 1 C = 1 -C C 2 1 P P C 2 C = 2 -C C 2 2 P P An increase in P ( = decrease in the after-tax interest rate) increases the first period consumption via the substitution effects (fourth term) while decreasing the same via the income effects. For the second period consumption, both substitution and income effects work to reduce the -132-

34 consumption. If the substitution elasticity between present and future consumption is d log(c 2/C 1) = d log 1+r (1- ) = logc 1 logc 2 - log P log P By the way, if the expense function is assumed to be homogeneous at degree one as to the price, then the sum of the substitution effects will be zero. C 1 log P C 2 +P =0 log P By substituting it into the definition equation of, logc 1 PC 2 = =S log P C 1+PC 2 Needless to say, S represents the household saving ratio. By using Slutzky's equation, logc 1 logc 1 =S ( - ) ; = log P log Thus, the elasticity ( ) of the household saving ratio to the after-tax interest rate is d logs = log r (1- ) = r (1- ) 1+r (1- ) (1-S )( - ) For the long run elasticity to be positive, > is needed. In other words, if = 1, the substitute elasticity between present and future consumption must exceed 1. When takes a large value, the value of needs to be even larger

35 References English (1) Atkinson, A.B., and M.A.King "Housing Policy, Taxation and Reform, Midland Bank Review, 1980 (2) Fullerton, D., "The Indexation of Interest, Depreciation, and Capital Gains: A Model of Investment Incentives," NBER, Working Paper No.1655, June, 1985 (3) Hendershott, P.H., and D.C.Ling,"Trading and the Tax Shelter Value of Depreciable Real Estate," National Tax Journal, Vol.XXXVII, No.2, June,1984 (4) Hendershott, P.H., and D.C., Ling,"Tax Reform and Housing," NBER. Working Paper, No.1524, December, 1984 (5) Hendershott, P.H., and D.C.,Ling,"The Administration Tax Reform Proposal and Housing," NBER. Working Paper, No.1740, October, 1985 (6) Iwata, K., "capital Costs of Housing Investment and Tax Policy,#" a paper presented at the CorGroup Meeting between the United States and Japan, July, 1986 (7) King, M.A., and D.Fullerton, "The Taxation of Income from Capital," the University of Chicago Press, 1984 (8) Rosen, H.S., "Housing Decision and the U.S.Income Tax: An Econometric Analysis," Journal of Public Economics 11,

36 Japanese (1) Iwata Kazumasa, Ikuo Suzuki and Atsushi Yoshida,"Tax System and International Harmony," ESP, June, 1986 (2) Ibid.,"Capital Costs of Capital Investment and Tax System," Economic Planning Agency Economic Research Institute, September, 1986 (3) Akira Oshida,"Holding of House as Selection of Assets," ESP, February, 1980 (4) Public Loan Corporation, "Public Loan Corporation Annual Report," 1985 (5) Housing Development Society,"Household Debt Incurring Behavior and Problems of Housing Loan," February, 1985 (6) General Affairs Bureau Statistics Bureau, "Housing Statistics Survey Report,"1983 (7) Ibid.,"Saving Trend Survey Report,"1985 (8) Ibid.,"Household Consumption Survey Report,"