|June 19, 2002||atimes.com|
Taxing Japan: How stupid can you get?
Japan's GDP growth for the January-March period was in positive territory for the first time in four quarters (up 1.4 percent from October-December 2001, translating to annualized growth of 5.7 percent) on the back of robust exports (up 6.4 percent, the first rise in six quarters) and a pick up in consumer spending (up 1.6 percent). The Tokyo Stock Exchange is the star performer among the world's major markets year-to-date, and especially since February. Exporters say that they can live with the stronger yen. Deflation persists, but is abating. And what does the administration of Prime Minister Junichiro Koizumi propose to do to help transform nascent into lasting recovery? Raise taxes. It defies the imagination.
The government's Tax Commission submitted a report last Friday urging that a wider portion of the public be taxed to restore the nation's financial health. The report's key recommendations include lowering the minimum taxable income, termed high relative to global standards. It suggests ways to raise the burden on businesses, including levying corporate taxes even on loss-making firms, and cutting tax breaks for small-to-medium-sized enterprises. And to top it all and make a set of stupid recommendations downright irresponsible, the report also recommends increasing the consumption tax from the current 5 percent.
Nikkei (Nihon Keizai Shimbun) staff writer Mikio Sugeno says in a commentary in the business daily's Saturday edition that, "As it now stands, implementing the plan would probably raise taxes by over 10 trillion yen (US$80 billion)." The slight sop of a proposed lowering of the effective corporate tax rate can't dispel the impression that Japan's venal politicians and paternalistic bureaucrats once again would rather risk killing off recovery in its early phases than opt for business deregulation and tax cuts to spur growth to broaden the tax base and reduce fiscal deficits. Note than in 1997 it was the Hashimoto government's increase in the consumption tax that put the economy into a tailspin which - by 1998 - put the entire financial system at risk and necessitated a 7 trillion yen public bailout of major banking institutions. A fine example of a tax increase that not only caused a tax revenue decrease, but helped put a large additional burden on the public ledger.
Sure, Japan's public debt stands at 130 percent and its budget deficit at 10 percent of gross domestic product, the highest such ratios for any of the world's major economies. And yes, the country has been punished for its lack of fiscal responsibility by seeing its sovereign credit rating downgraded several times and must set its public finances in order. But it is utterly absurd to conclude that the best way of doing that is by raising taxes. It is more absurd still to embark on such a project in a depressed, deflationary economic environment.
The first order of government business - as in fact was Koizumi's original charge to the Tax Commission - is to set clear signals, fiscal and monetary, to induce economic revitalization. The (central) Bank of Japan has done its job in that respect. Since adopting a policy of quantitative easing 15 months ago, base money supply (M1) has grown at an annual rate of more than 30 percent. What hasn't grown is broader money supply (M2). The trouble is that even the amplest of liquidity has not produced increased bank lending because of continuing deep weaknesses in banks' balance sheets and the absence of attractive lending and investment opportunities. That's where a supply-side tax cut could and should come in, but appears to be ruled out by stubborn tax panel and Ministry of Finance opposition at this point.
It is still early days in the tax debate. The real political battle over tax reform will start in the fall. Koizumi has already told the Council on Economic and Fiscal Policy to stay clear of the concrete details of tax reform. The upshot is that the old way of doing things remains unchanged: the Tax Commission maps out the basic course of tax reform and the ruling Liberal Democratic Party's research committee on the tax system then hammers out the details. But as things stand, dead-wrong tax-policy guidelines have been drafted and announced and the damage is done.
John Maynard Keynes is not our favorite economist. But he was a master of crafting witty and insightful one-liners. "Markets can remain irrational longer than you can remain solvent," he once quipped. The Japanese government can remain irrational longer than it (or anyone else) can remain solvent, would be an appropriate variant.
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