Friday, June 18, 2010

Creatively moving away from an export dependent economy

Having become entirely befuddled about things economic (does that make me an economist? Just joking!), I am a bit confused about PM Kan's plan to revitalize Japan. He plans to increase the consumption tax, double it actually, to the LDP recommended level of 10%. However, to show that he is no tax-and-spend lefty, he plans to cut the corporate tax first. Additionally, the DPJ has said that it was necessary to increase domestic consumption to get away from the old ship-everything-including-unemployment-elsewhere ways of the past.

Of course there is a lot of support for a consumption tax increase in Japan. Just ask around (might avoid asking housewives, but then again, this ain't 1989). I hear it all the time, sort of a knee-jerk reaction to everything. Raise the consumption tax. You might want to avoid follow-up questions as to what that will do to consumption and possible effects, good or bad, on the economy or anything along those lines for you'll quickly learn that Econ 101 was not something taken very seriously in school. (Perhaps they missed a key class due to the screening of a controversial film).

There is no doubt that a real tax increase has to come, but I wonder why only the regressive consumption tax is given serious consideration. Who actually believes that consumption will not take at least a serious short-term hit from a doubling of the rate? Could we not have an income tax increase? How about some well thought out combination of the two?

This could be Kan's version of the fabled Third Way. Or a new form of Trickle-down. Not sure which. If the corporations which got the tax cut (we've all heard ad nauseum how Japanese corporations are taxed at a higher rate than the US and others---no doubt a bad thing) then use part of the tax savings to hire new employees in Japan and not shift production overseas, then those new workers will have a salary and probably won't mind paying more to consume the same and even more to consume more! In that way, domestic consumption will increase, more people will have jobs, dependency on exports will decrease, and we'll live happily ever after.

In reality, the aim of this policy has more to do with cutting Japan's debt than increasing domestic consumption. I am glad to see that someone is actually addressing the issue instead of making noises of how debt doesn't really matter since it is owned domestically. I await the details of cost-cutting measures, but right now, it smells of the support of large corporations over citizens (subjects?) that has gone on for decades.*

4:52 pm: Edited for slight corrections and an addition.

*The Tokyo Foundation, a Tokyo based think tank, has a piece on the need to lower the corporate tax rate here. Thanks to Sigma1 for the link.


  1. Anonymous5:18 PM

    This article does a good job of explaining the theory at least behind this kind of thing. Lower tax rates, or at least at "non-distortionary" levels, can have impacts on where MNC prefer to be taxed, especially in terms of IP receipts, and also long-term investment planning and decisions of local firms. That said, it is always a fair comment to ask whether there is a more agile and discretionary mechanism rather than across the board tax cuts can lead to similar outcomes.

  2. Thanks for the link.