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Consumption Tax

November 22nd, 2014

If one counts out the recessions caused by U.S. economic concerns in 2001 and 2008, then it is noteworthy that 2 of the last three recessions in Japan—including the current one—have closely followed increases in the consumption tax.

It should also be noted that the initial consumption tax was accompanied by a lowering of taxes targeted at the upper end of the economic spectrum, and that in Japan, consumption tax has no exemptions for food or other necessities for lower-income people. Japan’s consumption tax just happens to remove large amounts of income just where it is needed most—not just out of personal needs, but out of the need for disposable income to fuel purchasing and therefore production.

If Japanese politicians want to raise the consumption tax yet again to 10%, as is currently planned, I think they would be well-served by doing so only after a 3-year experiment in which the tax is brought back down to 3% and original higher-end taxes reinstated. If the economy is doing worse after those three years (and not depressed by the world economy), then they can try a 10% consumption tax.

Not that that’s going to happen.

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  1. Troy
    November 23rd, 2014 at 11:15 | #1

    Japan’s tax situation is weird.

    Japan has a $50B military not a $800B+ one like the US. So you’d think they’d have a healthier economy.

    Tho the thing about gov’t spending that’s important to understand is that it’s not a dead loss, contrary to what conservatives appear to think, each dollar the gov’t spends ends up in the private sector immediately, which then spends it on, saves it, etc.

    So gov’t is just a massive redistribution engine, taking taxes from everyone and returning money to people who get its largesse one way or the other, either directly through gov’t salaries or benefits, or business from gov’t agencies, or indirectly through dealing with that group.

    The better an economy returns money to paycheck earners (aka ‘the masses’) the healthier it is.

    The more it’s stacked against the masses, with high prices exacted from the masses in various sectors — be it food, energy, housing, healthcare — that ends up with people who already have more money than they can spend, the more moribund and deflationary it becomes.

    My impression of Japan that its economy is not that “efficient” — there’s plenty of hidden intermediary ‘taxmen’ that jack up prices from the goods that move through them, and these profits everyone has to pay result in sustained fiscal pressure on the masses.

    Back in the 1990s the LDP reduced taxes a lot to try to counter-act this but the end result is just Japan’s truly colossal gov’t debt to GDP ratio.

    Now the LDP & the BOJ is just trying to print its way back to prosperity:

    http://research.stlouisfed.org/fred2/series/JPNASSETS

    is the BOJ’s expansion of the money base by distributing new JPY into the economy.

    This is a $700B/yr expansion, or $9000 per person age 15-64. If the BOJ just sent a check for 7万 to everyone that’d be the same scale of printing but of course a different dynamic!

    Speaking of per-capita, this graph is shocking to me:

    http://research.stlouisfed.org/fred2/series/LFWA64TTJPM647S

    but I’m not disheartened by it, I think it’s good for Japan in the long run to be a less overcrowded country, and that’s what depopulation looks like.

    It’s also probably good for me personally, being a Japanese speaker interested in moving back someday soon if necessary.

    http://research.stlouisfed.org/fred2/series/JPNPROINDMISMEI

    Shows Japan’s dynamic growth of the past — doubling production 1960-65, again ’65-70, but the next doubling took until the late 1980s to reach and since then growth has been a hard thing to find.

    The problem of no growth is that without it it’s impossible to pay off Japan’s colossal debt — everybody’s savings are going to have to be inflated away since so much of it is held in these unpayable government bonds.

    Well they could be paid but the government would have to tax the truly rich and powerful a lot lot more. And not the high-income entertainers, the government needs to go after all the rent-seekers in the economy, a lot of them to be found in the real estate sector especially.

    Then again,

    http://research.stlouisfed.org/fred2/series/QJPR628BIS

    shows this sector is already under sustained pressure.

  2. Tim Kane
    November 25th, 2014 at 00:50 | #2

    A long, long time ago I had a better idea of how Japan’s systems used to work than I do now. So, now, I’m talking in the abstract/theory.

    The problem in the U.S. is the concentration of wealth. In part the result of 35 years of supply side bias policies. Rich people take their excess dollars, and instead of buying goods and services, i.e. creating demand, they invest it in search of ROI, i.e. creating supply. The definition of being rich is not having to work for a living, but have your money do that for you – so to the Rich ROI is everything.

    When the ratio between supply and demand becomes too lopsided, too top heavy on the supply side you get deflationary recessions (depressions). But you also get a lot of other nasty things:

    1) As wealth concentrates relative to demand, it becomes harder and harder for the rich to get decent ROI. Now, Uncle Miltie taught me that the historical rate of return is 4%. So that means at a minimum the Rich need 4% ROI, but in truth what they really want is 7% because that doubles one’s estate every 10 years. Globally what they are getting now is south of 2%.

    2) That leads to investment bubbles. When some sector of the economy starts to provide decent ROI, such as, say, new technology which brings with it its own latent demand, investors flood into that market like moths to a light bulb, creating an investment bubble.

    3) Commercial, contract and property laws exist to channel human greed into socially constructive human enterprises, in securities this means “orthodox” investing. Investors are ‘roped off’ from making unorthodox investments, things like payday loans, unsecured credit with high interest, subprime mortgages, credit fault swap insurance. But when investors can’t get good ROI, they begin shouting for deregulation so they can move into the areas they’ve been roped off from in hopes of getting better and more ROI. Because they are rich and unrelenting, governments eventually give in. At that point we’re just one bubble popping away from a big chain reaction collapse.

    What does this have to do with Japan?

    Well, Japan, it seems to me, is a little bit different from most societies (and that’s true about a lot of things). It is famous for the Japanese housewife, who does ridiculous amounts of savings. Multiply that by about 30 million house wives. When those housewives put money in savings, they are taking from demand inside the Japanese economy and placing it in the supply side of the eocnomy.

    Just like the U.S. Japan is suffering from too much supply relative to demand. It may be that they also have too many rich people with too much money, but they also have too many middle class people saving too much money, that is, taking resources out of the demand side of the economy and putting it into the supply side of the economy.

    Moreover, Japan, like many East Asian economies, plays a similar role globally by having chronic trade surpluses, year after year, decade after decade, going well over a half century now. Money flows into Japan, and out of the global demand, into Japan’s system, never to come back out again, where upon it ends up in either a rich persons portfolio or that of a Japanese housewife.

    So my 10,000 mile away view of Japan is that they need to create massive incentives to reduce savings and increase spending. Perhaps they don’t have, but could use, a social security type retirement plan so that people wouldn’t need to save so much (I’m not sure that would work, but I think it explains why Americans are more spendthrifts). Perhaps they should be taxing net worth AND high incomes instead of consumption. Perhaps they should be doing all of those suggestions and more along the same lines. Perhaps.

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