Relationship of Tax System to the Business Succession Problem in Behavioral Economics:
from Passive to Active Payment of Taxes by Reason-based Choice
Hiromi FUJIMORI
Aoyamagakuin University
Abstract
In this paper, the reason-based choice hypothesis of Shafir-Simonson-Tversky (1993) and
Shafir (1993) is employed to evaluate the efficiency of tax systems in terms of business
succession. This hypothesis has been proposed as an alternative to the utility maximization
model. Under reason-based choice, actors choose options by seeking and constructing
reasons rather than by utility maximization. As applied to the tax issues of business
succession, namely, inheritance and donation taxes, the reason-based choice framework
suggests that the payment of taxes should change from passive to active.
Keywords
Business Succession Taxation Scheme, Reason-based Choice, Behavioral Economics
The Japanese government’s “Japan Revitalization Strategy” was approved by the country’s
cabinet in June. This strategy was designed as the “third arrow” of the prime minister’s
“Abenomics” program, with the goal of smoothing previous policy initiatives for business
succession. In Teikoku Databank’s "Survey of Companies Related to Business Succession,"
86.3% of respondents reported that the management of business inheritance was
problematic. However, when asked about their plans for inheritance, 25.3% companies
responded that "plan to cede the business still is not" or "no one fit for the post" as the reasons
for these problems. "The handling of personal assets, such as its own shares" was
problematic for 17.0% of respondents, and 10.0% mentioned "tax measures such as
inheritance tax and gift tax." These results indicate that companies feel the need for business
succession but have not developed or executed clear plans for this process. There exists an
apparent difference between awareness of the business succession problem and the
behavior taken to resolve it.
According to Takasawa (2008, 2013), the business succession problem may be divided into
two problems: physical and human succession. Human succession refers to ensuring the
security of the firm through actions such as the training of successors, while the physical
inheritance problem refers to ensuring funds for the inheritance tax. Major problems for
human succession include a lack of suitable employees and the time required to vet
candidates. The main problems of physical succession are inheritance and gift taxes and the
lack of funds for the right of management acquisition. Therefore, many firms consider tax
reduction to be the primary concern in business succession, although the practicalities of
human succession remain an issue as well.
Even when governments attempt to reduce the burden on taxpayers, the public awareness
of the tax as something intended to be collected sustains the psychological or mental stress
of taxation. In Japan, the term "collection" is used in association with taxation. Conversely,
when describing taxation in the United Kingdom and the United States, the term "support" is
used. This difference in expression affects the emotional psychology of the taxpayer and
results in changes in their behavior.
This framing effect was investigated by Kahneman, who won the Nobel Prize in Economics
in 2002, opening the new field of behavioral economics (Tversky-Kahneman 1981, 1986;
Kahneman-Tvrsky 1984)1. Even when the expected values of the options in a choice are the
same, the change of context caused by the framing effect causes actors to select a given
option.
In terms of taxation, the negative expression "collection" creates images of loss and causes
taxpayers to practice avoidance, while the positive expression "support" does not cause this
negative reaction. However, it must be noted that human choice fluctuates easily and is
inconsistent, especially regarding financial problems.
This paper employs the reason-based choice hypothesis to evaluate the efficiency of the
tax systems involved in business. This hypothesis was proposed by Shafir-SimonsonTversky (1993) and Shafir (1993) as an alternative to the utility maximization model. Under
reason-based choice, actors choose options by seeking and constructing reasons rather than
by utility maximization. Even when faced with a difficult choice, actors often choose the active
option by developing reasons for the choice. This approach leads to consistency in decisionmaking.
The rationality of reason-based choice is discussed by Fujimori et al. (2013) in terms of
passive and active resistance in the process of decision-making. Previous experimental
results on the role of emotions in traditional economics have suggested that the active option
is selected more consistently. When applied to the tax issues related to business succession
discussed in this study, the hypothesis suggests that the passive payment of taxes should
be made more active.
Reference
1
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http://www.tdb.co.jp/report/watching/press/pdf/p130702.pdf