20% Sales Tax
I have heard this idea tossed around for some time in Japan–to increase the national sales tax from 5% to 20% and so do away with some other taxes. To me, this sounds like a foolish idea–it is essentially a way to tax the poor and give the rich a relative break, and could be a huge brake on spending in general. As I recall, the last times they raised the sales tax–from nothing to 3%, and then up to 5%–the economy did very poorly. Of course, other things happened at those times that make it uncertain as to how much of a bad effect the sales tax increases alone had, but it seems almost intuitive.
I do recall that before Japan had the sales tax, there were other taxes, like luxury taxes, that were aimed at the rich–and these taxes disappeared, the sales tax taking their place. To me, the sales tax in Japan has always seemed a way to make taxes in Japan less progressive. And it helps to remember that there are no exceptions for the sales tax–you pay the tax for food, for example, unlike in the United States.
However, my understanding of this issue and how it works is spotty at best. So could somebody explain to me how a 20% national sales tax is not a bad idea?
Well, if you want to reduce consumption and increase savings, then a sales tax is a good idea.
The old rule of thumb: that which you subsidize you get more of, that which you tax you get less of.
In Missouri, everything is subject to the sales tax, even food – almost always, subject to 7%.
In most situations, a sales tax is a bad idea – but I’m not intimately familiar with Japan’s economic situation.
Sales tax on food varies from state to state. Here in Washington, no sales tax on food- but between state and local sales taxes, the sales tax rate is as much as 9.2%.
Of course, we don’t have a state income tax, either.
No doubt you’re going to hear from people that say a flat sales tax of 20% is “better” because it’s closer to the “flat tax” type of idea… which I’m sure you, Luis, would be a BIG fan of. NOT. 😉
This is a variation on the “Fair Tax” scheme proposed by a motley assortment of minarchists and right-libertarians here in the US.
It’s . . . a bad idea, for the simple reason that there is an immense amount of rentierism that continuously accumulates in any economy.
20% Sales tax is also similar to the UK’s VAT, and the UK economy is totally screwed due to unchecked speculation in bubble real estate this decade. Their national debt is just 50% of GDP though but the VAT is no panacea for them.
Any tax regimen must tax speculative profits and economic rents first and foremost or it will push the larger economy into natural state of rent-seeking.
The Japan bubble economy of the late 80s came from speculation (rent-seeking) in real estate, as did the US/UK bubble economies this decade.
An aggressive VAT will cause consumer incomes to redirect not into savings but rents (and land values). High land values are the sign of a bubble economy, not a sound one, since high land values just bleed capital from the productive of the society to the unproductive, parasitical rentiers.
The “least worst” tax, in the words of both Milton Friedman and William F Buckley, is the land value tax, where the unimproved value of land is aggressively taxed to encourage productive employment of the land and reduce counter-productive speculative activities and management patterns.
Japan has a vestigial version of the land tax in that Tokyo taxes unimproved land at a slightly higher millage than improved land (this is called a “split [property] tax”).
So my proposal to fix any economy is tax the idle wealthy — who collectively hold their wealth largely in land and natural resources — more, and largely untax all wage-earners and also those who actually risk capital into productive enterprises.