Japan eyes consumption tax hike

[Puppycow]

Link

Actually, this move is not as unpopular as you would think.

66% back consumption tax hike

The survey showed that 66 percent of respondents believe raising the consumption tax rate is necessary for the reconstruction of public finances and maintenance of the social security system, far outnumbering the 29 percent who do not think so.

Broken down by party allegiance, there was no great difference on the consumption tax hike issue. Seventy percent of DPJ supporters and 72 percent of LDP supporters said raising the consumption tax rate is necessary.

By age, a majority of respondents in all brackets think a higher consumption tax rate is needed. Most support for the proposal came from those in their 50s, with 70 percent in favor, and the least came from those in their 20s, with 56 percent.

By gender, 73 percent of male respondents and 60 percent of female respondents said a higher consumption tax rate is necessary.
(Jun. 15, 2010)

I think that this is a good idea for Japan considering that the country is stuck in a deflation trend and the central bank doesn't want to do anything about it. Better to do this now than to wait for a debt crisis like what happened in Greece.

The only thing I'm not sure of though is the arithmetic. The current consumption tax rate is 5% and I don't know what percentage of the government's revenue that accounts for. I wonder how much of a difference raising it to 10% would make, for example.

 

[Puppycow]

I found an answer to how much help raising the sales tax would be:

So far, Mr Kan’s modest proposal is to keep new borrowing under the record $500bn planned this year. Instead, he should reinstate a $330bn cap on new government bond issues imposed in 2001 by Junichiro Koizumi, the last prime minister to remain in office for more than a year. To do so would probably mean having to cut Mr Hatoyama’s child allowance altogether. Neither could Mr Kan be timid about increasing Japan’s sales tax. Each percentage point would add an estimated $28bn to state coffers and doubling the rate to 10 per cent or even tripling it to 15 per cent would go a long way in helping Japan to balance its books.

So if those figures are correct, raising the sales tax to 10% would reduce the budget deficit by $140 billion and raising it to 15% would reduce it by $280 billion.

If it were raised by 2% each year for 5 years, it would basically offset the persistent deflation, and prices paid by consumers would stay the same or go up slightly. The net result would still be less inflation than is typical in the US.

 

[Puppycow]

Japan's current consumption tax rate of 5% is much less than is typical in Europe

So even raising it to 15% (tripling) does not seem unreasonable.

 

[Puppycow]

BTW, guess who in Japan is against this idea?

The socialists and the communists

 

[timhau]

I thought that one of Japan's problems was that consumers didn't consume enough. If Russian consumers are supposedly the ones that say "Eat, drink, and be merry, for tomorrow our money may be worth nothing", the Japanese are the compulsive savers.

 

[Puppycow]

Not anymore. This is a few years old now, but it makes the point.

 

[MikeMangum]

So if those figures are correct, raising the sales tax to 10% would reduce the budget deficit by $140 billion and raising it to 15% would reduce it by $280 billion.

I have a hard time believing that the effect of raising a tax like that would be linear.

If it were raised by 2% each year for 5 years, it would basically offset the persistent deflation, and prices paid by consumers would stay the same or go up slightly. The net result would still be less inflation than is typical in the US.

Increasing a consumption tax isn't going to do anything to reduce deflation. Changes in prices (across the entire economy) are a function of money supply and velocity. If you raise the prices of everything across the board, you get lower velocity. There are very few things for which demand has very low elasticity.

 

[Puppycow]

Increasing a consumption tax isn't going to do anything to reduce deflation. Changes in prices (across the entire economy) are a function of money supply and velocity. If you raise the prices of everything across the board, you get lower velocity. There are very few things for which demand has very low elasticity.

What I meant is that raising the consumption tax raises the total price of a product, but if the underlying price is going down, the extra tax would offset that and the final price paid by the end user would be about the same.

 

[MikeMangum]

What I meant is that raising the consumption tax raises the total price of a product, but if the underlying price is going down, the extra tax would offset that and the final price paid by the end user would be about the same.

Yeah, exactly the same, except for the reduced economic output, that is.

 

[Puppycow]

Yeah, exactly the same, except for the reduced economic output, that is.

The nominal economic output would be reduced, but not the real economic output, unless I'm missing something.

 

[Rockingham AH Deist]

Not anymore. This is a few years old now, but it makes the point.

AH. So, in addition to being a regressive tax, it would be a tax that disproportianately hurt the elderly.

Link

Actually, this move is not as unpopular as you would think.



I think that this is a good idea for Japan considering that the country is stuck in a deflation trend and the central bank doesn't want to do anything about it. Better to do this now than to wait for a debt crisis like what happened in Greece.

Why the consumption tax in particular... is their anything that makes that option more desirable then the alternatives?(personally I'd go for a Land Value tax. Or hell, help the planet and create/raize a carbon tax)

Thing is it will hurt the poor and elderly the most, so surely another tax should be created or raised instead.

 

[MikeMangum]

The nominal economic output would be reduced, but not the real economic output, unless I'm missing something.

You are missing something. I'm not sure if you understand the meaning of the term "real". The price of goods increases relative to the money available with which to buy those goods, causing fewer of those goods to be purchased (I'm not even going to attempt to guess whether the effect would be large or small). This causes a reduction in production, in the form of the supply curve moving the opposite of that shown in this graph:

http://en.wikipedia.org/wiki/File:Supply-demand-right-shift-supply.svg

Fewer goods are produced, and those fewer goods cost more. In other words, both production AND purchasing power decline. The term "Real" refers to comparing changes in output relative to changes in purchasing power, with the assumption that inflation/deflation are good measures of purchasing power with which to correct measurements of growth to find actual, real growth. If both output AND purchasing power decrease, it is hard to see how that doesn't reduce real economic output.

The only real question is whether the effect would be small enough not to matter, or large enough to be a concern.

 

[MikeMangum]

AH. So, in addition to being a regressive tax, it would be a tax that disproportianately hurt the elderly.


Why the consumption tax in particular... is their anything that makes that option more desirable then the alternatives?(personally I'd go for a Land Value tax. Or hell, help the planet and create/raize a carbon tax)

Thing is it will hurt the poor and elderly the most, so surely another tax should be created or raised instead.

The benefit of a consumption tax is people get to choose what taxes they will pay because they get to choose what they purchase. For some goods and services, demand is very inelastic (things like food, or insulin, or utilities) and that is where the tax burden is indeed regressive, but other items that are not essentials make up a substantial portion of spending. Even the basics are not as regressive as some make it out to be. People can choose to buy store brand over name brand, frozen vegetables over fresh, to buy chicken instead of steak, etc.

For those who have already reduced the expenditures on basics substantially by purchasing basics very frugally, there is not nearly as much wiggle room and the impact to them is larger compared to their ability to compensate by switching to less expensive products or reducing purchases altogether. That is one of the reasons that sales taxes often are not levied on food purchases, although that varies.

 

[Puppycow]

You are missing something. I'm not sure if you understand the meaning of the term "real". The price of goods increases relative to the money available with which to buy those goods, causing fewer of those goods to be purchased (I'm not even going to attempt to guess whether the effect would be large or small). This causes a reduction in production, in the form of the supply curve moving the opposite of that shown in this graph:

http://en.wikipedia.org/wiki/File:Supply-demand-right-shift-supply.svg

Fewer goods are produced, and those fewer goods cost more. In other words, both production AND purchasing power decline. The term "Real" refers to comparing changes in output relative to changes in purchasing power, with the assumption that inflation/deflation are good measures of purchasing power with which to correct measurements of growth to find actual, real growth. If both output AND purchasing power decrease, it is hard to see how that doesn't reduce real economic output.

The only real question is whether the effect would be small enough not to matter, or large enough to be a concern.

OK, I see what you are getting at. I think that's correct in theory.

But, given that the government of Japan is deeply in debt, isn't it necessary to do something? This seems like a simple solution. If it causes prices to rise due to less production, well, that would be one way to end the persistent deflation. When a government runs up too much debt, eventually the piper has to be paid. Just like when a person gets too deeply in debt, they may have to go through a period of austerity, it seems inevitable for Japan to do the same.

AH. So, in addition to being a regressive tax, it would be a tax that disproportianately hurt the elderly.

Why the consumption tax in particular... is their anything that makes that option more desirable then the alternatives?(personally I'd go for a Land Value tax. Or hell, help the planet and create/raize a carbon tax)

Thing is it will hurt the poor and elderly the most, so surely another tax should be created or raised instead.

Well, as I mentioned in a post above, this tax is much lower in Japan than in European countries. In Europe it is mostly in the 15% to 20% range. I don't hear the Europeans complaining that this is unreasonable or disproportionately hurts the poor or elderly. Raising a carbon tax OTOH, might be a good idea, but probably more complicated. A consumption tax is also approximately a tax on carbon, but not exactly a linear one, since the production of almost all goods and services requires the use of carbon. Recessions (reduced economic activity) lead to less use of carbon, and a higher consumption tax would probably have a similar effect.

BTW, Paul Volcker has also suggested that the US do the same thing.

 

[drkitten]

But, given that the government of Japan is deeply in debt, isn't it necessary to do something? This seems like a simple solution. If it causes prices to rise due to less production, well, that would be one way to end the persistent deflation. When a government runs up too much debt, eventually the piper has to be paid. Just like when a person gets too deeply in debt, they may have to go through a period of austerity, it seems inevitable for Japan to do the same.p

Er, no. This is a classic fallacy (microeconomics and macroeconomics are different fields for a reason).

When a government runs up debt, it's got more options than a person. The usual solution is simply to inflate the currency and pay off the debt in cheaper money. If Japan printed enough currency to drop the yen to 200/dollar, then it would only have to sell half as many cars and stereos.

And, incidentally, it would also solve the liquidity crisis and deal with the impending deflation.

But, of course, it would also wipe out the life savings of millions of geriatric Japanese, which is why the rather counter-productive consumption tax is being proposed instead..... (You notice that the older people are, they more they like this idea...)

I think the consumption tax is a bad idea. Deflation is usually caused by underconsumption, consumption taxes make underconsumption worse. This looks like fighting an electrical fire by pouring water on it....

 

[MikeMangum]

As drkitten mentioned, governments (assuming they aren't on the Euro) have 3 options for dealing with debt: 1) raising taxes, 2) reducing spending, and 3) inflating their currency. Inflating the currency only works for a country when that county's debt is denominated in their own currency; for Japan, that is the case.

An increase in the consumption tax might well be necessary for Japan, but it should also look at the other two legs of the triangle. Japan's government spending is fairly high at 30% of GDP, and they've spent the last decade and a half attempting Keynesian stimulus to their economy which has not improved the economy and only increased Japan's debt. Japan's cost of borrowing has been extremely low over the past several decades, but that will change as retiring Japanese citizens start drawing down their reserves of Japanese sovereign debt. Japan is also facing it's own demographic problems similar to those facing the US with the baby boomers, except even worse since their birth rate is lower. That is going to drive up expenditures on pensions and health care, reducing the number of active workers per retiree.

From 2006:

TOKYO, Jan 10, 2006 (IPS) - Gender equality has been a distant dream in Japan but a drastic national population decline is forcing the government to take steps to help women - if only to encourage them to have more children.

''The yellow signal has started flickering,'' said health minister Jiro Kawasaki, late December, referring to the low birth rate and the consequent threat to the national economy.

...

Indeed, experts point out, declining birth rates have long been a nagging problem for the government that has tried various programmes during the past decade and failed.

For example, the health ministry advocated two ‘Angel Plans' where government budgets expanded the number of nurseries for working mothers during the nineties to more than 24,000 across the country.

But to no avail. Japan's current population of 128 million is expected to drop to 100 million in 2050 if nothing in a business as usual scenario.

Today, according to reports released by the National Institute of Population and Social Security last month, Japan's birth rate is declining extremely fast, compared to that in the United States and Europe and identified young people as not having children because they cannot afford to get married or because of heavy education costs.

Increased taxes have costs. One of those costs is that the tax burden is born almost exclusively by workers, people of an age to have children. Japan's theory of dealing with the problem has been essentially "we'll tax you younger people, reducing your income, to then turn around and provide you subsidies for child care with a portion of the money we took from you".

Any solution for Japan's problems should include substantial reductions in expenditures, simply because their carrying cost for their debt is going to increase substantially in the coming decade and tax increases will not be able to produce sufficient revenue increases to cover them. Reductions in government expenditures (and a more expansionary monetary policy) would help with economic growth, which does more to increase government revenues than increased taxes.

Increased taxes hit the newest workers the hardest, since they can expect to pay those higher tax rates throughout their adult lives and reduced incomes early in their adult lives have a compound effect on reduced wealth accumulation. Monetary expansion hits retirees hardest, since they have accumulated the most wealth denominated in the currency to be devalued - then again, they enjoyed the benefits of that accumulated government debt whereas newer workers saw much less of the benefit. Government subsidies help only those who get them at the expense of every other taxpayer AND at the expense of economic growth. Cutting government spending in general (and cutting subsidies completely) while trying to balance monetary expansion with tax increases so that no portion of society bears an undue share of the burden seems to me like the only thing that is both fair and will work.

 

[Puppycow]

When a government runs up debt, it's got more options than a person. The usual solution is simply to inflate the currency and pay off the debt in cheaper money. If Japan printed enough currency to drop the yen to 200/dollar, then it would only have to sell half as many cars and stereos.

Well, yes and no. The central bank can do this, the government cannot. And right now the central bank doesn't seem to want to do it. See this recent headline for example:
Shirakawa vs. Kan: Will Bernanke Take Sides?

Though the debate has quieted in recent weeks, Japan’s two top economic policymakers had a spirited exchange a few weeks back over inflation targeting: Mr. Kan in favor, Mr. Shirakawa against.

Here’s what Mr. Bernanke had to say on the subject seven years ago, when he was then a mere Fed governor: “By clarifying the objectives of the central bank, an explicit inflation target can help to focus and anchor inflation expectations, reduce uncertainty in financial markets, and add structure to the policy framework.” And, wait… there’s more. “For Japan, given the recent history of costly deflation, however, an inflation target may not go far enough. A better strategy for Japanese monetary policy might be a publicly announced, gradually rising price-level target.”

So what should the government do in such a situation given that the money supply is controlled by a central banker that doesn't believe in inflation targeting? I believe that the current governor's term in office ends in 2013 and that he cannot easily be removed by the government.

 

[Puppycow]

As drkitten mentioned, governments (assuming they aren't on the Euro) have 3 options for dealing with debt: 1) raising taxes, 2) reducing spending, and 3) inflating their currency. Inflating the currency only works for a country when that county's debt is denominated in their own currency; for Japan, that is the case.

As I mentioned in the post above though, if you consider the government and the central bank as separate entities, the government can only control 1 and 2, while the central bank has control over 3.

An increase in the consumption tax might well be necessary for Japan, but it should also look at the other two legs of the triangle. Japan's government spending is fairly high at 30% of GDP, and they've spent the last decade and a half attempting Keynesian stimulus to their economy which has not improved the economy and only increased Japan's debt.

The current government seems to be ending that approach, at least as far as the stimulus-though-bridges-to-nowhere approach goes. They are OTOH subsidizing families with young children now as an alternative. I don't know if this will have any effect on the birthrate though. I rather doubt it, but we'll wait and see what the result is.

I'm all for using the third lever (monetary expansion) as well, but the BoJ has to do that, and I don't think it should be the only lever they use. Getting inflation back up to a similar level to the rest of the developed world would be good, but beyond that would be a little risky IMO.

 

[Puppycow]

Anyway, here's the latest:

Kan yesterday said he will consider the proposal by the main opposition Liberal Democratic Party to double the national sales tax to 10 percent as he seeks to reduce the world’s largest public debt. Speaking after the DPJ released its policy platform for next month’s mid-term elections, Kan said Japan must “rehabilitate” its fiscal situation.

 

[drkitten]

Well, yes and no. The central bank can do this, the government cannot.

Shrug. If you have an incompetent in office, remove him. If the Foreign Minister decided to declare war on North Korea without the authorization of the Prime Minister, you'd have the same problem. This isn't an economic issue, but a staffing issue.

So what should the government do in such a situation given that the money supply is controlled by a central banker that doesn't believe in inflation targeting? I believe that the current governor's term in office ends in 2013 and that he cannot easily be removed by the government.

Japan is a sovereign country; the government can do anything. Pass a special emergency decree removing him from office. Create a new temporary branch of government with the authority to issue yen scrip that must be redeemed for face value by the central bank whether the banker wants to or not. Inflate the currency by statute.

Ultimately, the independence of the central bank lasts only as long as the government wants it to. The more recalcitrant the banker and the higher the states, the more likely the government will be to resort to force majeur -- and the more popular that move will be.