Japan from the inside out

Two drunks in a bar

Posted by ampontan on Friday, February 19, 2010

The central contradiction in modern liberal politics is that Otto von Bismarck’s entitlement state for cradle to grave financial security is no longer affordable. The model has reached the limit of its ability to tax private income and still allow enough economic growth to finance its transfer payments.
– WSJ Editorial

TELL ME if you’ve already heard this one: two drunks were talking in a bar about how to come up with the money to buy another bottle…

Well, OK. They might not have been drunk, and they weren’t in a bar, but they were looking for ways to make other people pay for their drinks.

The two men batting ideas back and forth were Prime Minister Hatoyama Yukio and Japan Communist Party Chief Shii Kazuo during a conversation in the Diet. According to the JCP, Mr. Shii said:

The retained earnings of big corporations are blunting Japanese economic growth capabilities.

See why people thought the story was about two drunks in a bar? Nobody sober would listen to any Communist Party member talking about economic growth or how it relates to corporate internal reserves.

It’s also difficult to imagine a sober man giving Mr. Hatoyama’s answer.

I’d like to examine the appropriate taxation of retained earnings.

It’s difficult to imagine because there is no appropriate taxation of retained earnings. A company’s internal reserves are what’s left after its profits have already been taxed. Would they tax someone’s bank account because he was saving the money instead of spending it?

Another possibility is that Mr. Hatoyama was sober and just indulging his fraternalist habit of saying whatever he thinks will please the person he’s talking to at the time.

Finding a willing listener for a change, Mr. Shii then suggested the maximum tax income tax rate and preferential treatment of securities should be revised to boost the tax on those with high income. Why? Because of a growing income gap among the people.

Comrades! Incomes have to be redistributed to reduce inequality!

A sober man would say: Redistribution of the wealth from those who have a lot of it to those who don’t have as much acts as a brake on those people who have demonstrated their capability to improve society for everyone, even if only by offering consumers what they want. Limiting their behavior deprives society of these benefits.

The prime minister was still a bit woozy when he talked to the media later. He said:

It’s not my intention to say anything specific, but because it was a plan by the Communist Party, I did say I’d like to examine it. It’s natural to want to adopt a good plan, regardless of the party that proposed it…I didn’t say (we’d be) forward looking, or backward looking, just that I’d like to examine it.

Is that man ever going to learn to stop shoveling after he digs himself a hole?

At a press conference the next day, Chief Cabinet Secretary Hirano Hirofumi tried to scrape off the bottom of the prime minister’s shoe with a fib instead of a stick:

It’s a topic in the arena of general debate over the tax system. We’re not going to isolate only that for examination…I don’t think the prime minister said we were going to examine it. Wasn’t his response that we must examine the tax system in general?

Minezaki Naoki, Deputy Finance Minister, contradicted him with a stick of his own:

While it is a topic for the Tax Commission, the handling of the topic is still pending.

Six months in office and they still can’t get their story straight.

As for Mr. Hatoyama, it must be all those years he spent in the opposition. It still hasn’t dawned on the prime minister that people listen when the head of government talks. The next day, he allowed:

It’s a subject for consideration, but nothing has been decided yet.

But Okamura Tadashi, the chairman of the Japan Chamber of Commerce and Industry, said:

What are you two drinking?

No, that’s not what he really said. It’s what he thought when he curbed his tongue. What he did say was:

As a general idea, it’s inappropriate from the standpoint of a corporation’s international competitiveness.

The Nikkei Shimbun added in an article of its own that it would have a negative impact on hiring and salaries.

But if there’s one thing big business has learned in the days of big government, it’s how to go along to get along. Mr. Okamura continued:

There’s going to be a broad reform of the tax system, so if it was mentioned as one category for examination, we have no choice but to simply accept it as such.

By the numbers

Companies retain earnings for three reasons. First, they use them to expand their business using their own resources, rather than using borrowed money they have to pay to borrow. That results in wealth creation–additional taxable income. Second, they can pay them out as dividends, when they are ordinarily taxed again. High dividend taxes are conducive to higher retained earnings. The lower the tax on dividends, the more dividends are paid from retained earnings. Third and finally, the internal reserves can be saved in the company.

Higher taxes on dividends or retained earnings reduce economic growth. They don’t expand it.

The problem as Mr. Shii sees it is that Japan has reduced dividend taxes 10% since 2003 and currently exempts the first JPY one million in dividends from taxes (about $US 11,000), but corporate internal reserves are at relatively high levels. Instead of taxing those reserves, however, a more rational solution would be to remove the structural impediments on investment.

There’s another reason large Japanese companies have more retained earnings these days. The government made repatriation of funds from overseas subsidiaries and other operations tax exempt in 2009. That resulted in a JPY two trillion (about $US 11 billion) increase in money coming into the country last year instead of being retained abroad, according to another article in today’s Nikkei Shimbun.

That’s JPY two trillion more to be used for expansion or dividend payments than they normally would have had.

That’s what people mean when they say lower taxes make the pie grow bigger. A bigger pie means more tax revenue. Isn’t that the point of the exercise?

Japan could maintain the tax code amendments that promote growth. Or it could tax those profits again, after they’ve already been taxed once; increase the taxes on dividends, which is double taxation to begin with; or restore the tax on repatriated corporate profits, ensuring those profits stay overseas instead of being returned to Japan.

But that’s only if it listens to two drunks in a bar talking about how to find the money to keep drinking.

One Response to “Two drunks in a bar”

  1. Bismarck created the total war state. It costs a lot of money and a lot of bodies.
    Nowadays, high tech is more important. Immigrants with the right skills can help create a viable weapons industry. But all that production like fireworks, goes up in smoke, often with consequences like injuries, property damge and radiation pollution.

    At least Japan have renounced the use of war! As a result, their war industry is smaller but they pay a large amount to the USA for their protective nuclear weapons.

    A non-growth policy is a sure way to avoid war if adopted by all countries. Growth has short term tax costs such as increasing population etc.

    The lower taxes means more tax Laffer myth has been exploded. Reaganomics does not work, except in a high growth, high immigration economy.

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