Sunday, August 12, 2012

He Did It

That is the takeaway for this weekend.

Decades ago this blessed land's bureaucrats and the research arm of the Liberal Democratic Party established that government finances faced a demographic wall, where the European-style social welfare benefits and United States-levels of taxation would collide with a wave of retirees, necessitating either:

1) mass privatization of government functions

2) reversals in the promises made to the citizens

3) higher taxation

4) potentially hyper-inflationary levels of government indebtedness, or

5) a combination of the above.

The solution the bureaucrats and the LDP proposed was a consumption tax, with an initial target rate of 10%.

It has taken thirty years to walk the walk from realization to realization. At least three prime ministers have had their heads handed to them over the tax, first for the imposition of a nominal 3% tax, then for each step of the march up to 10%.

However, on Friday, with every political instinct and a slug of economic analysis pulling in the opposite direction, Prime Minister Noda Yoshihiko managed to drag an opposition-controlled House of Councillors over the goal line.

The political costs have been enormous. Noda will most likely be rewarded, as he should be, with reelection as party president in September. However, he will preside over a much diminished Democratic Party of Japan, over 60 members of which have decamped in one way or another over the consumption tax. The Cabinet's and the DPJ's opinion polling numbers are in the cellar, with an election looming.

One can hate the raising of the consumption tax...and a lot of folks do, for reasons both intellectually sound and transparently selfish.

However, one cannot, no, one must not deny the bravery and tenacity of the prime minister, who sacrificed political blood and capital his party could not spare. When all the sirens are singing sweet songs about how cheaply the government can borrow money, Noda and his wounded party have sent a signal to the holders of Japan's bonds that the government of this blessed land will make good upon its debts through a willingness to both inflict pain and accept annihilation.


"Cassandra" said...

It was Walter Mondale who spoiled it for everybody for the following three decades by suggesting taxes *MIGHT* have to rise, a bout of honesty upon which he was ultimately impaled, and from which political integrity in the US has never recovered. [A conservative!!] govt in Germany stoically mustered support the same several years ago, and has survived intact. I hope it is a tell-tale for democracies - NOT for tax rise itself - but insofar as it might (finally) indicate a willingness to tackle politically radioactive issues.

MTC said...

Cassandra -

First, good to hear from you. It has been a long time.

Second, academic economists must be called to task for providing the intellectual cover for inaction, malfeasance or even grevious harm inflicted by tax-cutting and regulation-gutting politicians (in California with Proposition 13; in the policy response to the East Asian Currency crisis, and in the global triple tech/housing/banking fol-de-rol of 1998-2008) upon the economic well-being of common citizens. Without the folks at Chicago, George Mason and their acolytes around the world, it would have been a much, much harder row to hoe for those trying to make everyone forget the lessons of the boom-bust cycles of the 19th century and the Great Depression.

Troy said...

Kudos for raising taxes, finally.

Like you say, Japan has a VERY low tax-to-GDP ratio compared to the nordic states.

They don't enjoy paying their 40%+ tax burdens, but they can sleep at night knowing their ship of state is pointed roughly in the right direction for the foreseeable future.

AFAICT the 10% tax rise is good for only 1/3 the deficit closure that is needed to keep a going concern (without recourse to naked printing), but it's a start.

Land values are still insanely high in Japan so I'd like to see a LVT, but I guess that's impossible.

Still, I subscribe to the thesis that all taxes come out of rents (and land values) so I think the 10% rate will in fact take a bite out of Tokyo rents and land values eventually.

Which is good, because I hope to move back this decade. Well, 'hope' is too strong a word, maybe.

Anonymous said...

What I wonder is why this persistent consumption tax fetish? Didn't this smother recovery when it went from 3% to 5% in 1997? Consumers will be aware of the rise in prices each time they make a purchase, and, understanding their salaries will not go up, will cut back their spending. It is particularly burdensome on low income people. Why not a progressive increase in the income tax? It would be more fair and less harmful to the prospects for growth.

Mark said...

What are the political costs, in your opinion? And what do you think about the fact that most likely Japan will use the money raised from the consumption tax to loan to western governments so they can continue to overspend?

Unknown said...

Japan does need tax reform, but I think raising the consumption tax is a very bad way of doing it.

The increase is more likely to create a large group of urban poor, who will be force to curtail expenditures. Plus those who currently rent apartments but barely make ends meet are also likely to stop renting and move back in with their parents, resulting in even further negative pressure on the desire to have children and hurting the economy. This would cause a drop in rent prices, further hurting the economy as the real estate market drops.

If Japan develops a large class of the visibly, unavoidably poor, the polite fiction that everyone in Japan is middle class will be shattered (it's already pretty cracked), and social unrest will spike.

Troy said...

"This would cause a drop in rent prices, further hurting the economy as the real estate market drops."

I would argue that rents are already too high, and if higher taxes result in lower rents and housing costs then they will be a good thing!

Real estate valuations are something of a wealth-sink -- since land is in such scarce supply, we have to bid against each other, pushing its cost up.

The good news for Japan is that with depopulation will come lower housing costs, at least outside the major "magnet" metropolises.