AMPONTAN

Japan from the inside out

Adult education

Posted by ampontan on Tuesday, April 27, 2010

ANYONE IN JAPAN who was looking forward to a healthier economy should be warned that it’s going to get a lot sicker before the vital signs show a sustainable recovery. That’s the price to be paid when the patient is in the care of quack doctors. When the internist and surgeon are guilty of malpractice, the patient’s prognosis will be poor regardless of his constitution. Now the Japanese economy must undergo the modern equivalent of bleeding with leeches with the treatment of an internist from the monetary side and a sawbones from the fiscal side.

During a speech in New York on the 2nd, Shirakawa Masa’aki, the Governor of the Bank of Japan, said:

The average tax rate in European countries is 20%, while Japan’s is 5%. There’s plenty of leeway to raise taxes.

It’s a shame he doesn’t think there’s any leeway to raise growth first.

Actually, “taxes” was the incorrect word choice. The proper term arose when paper doll Finance Minister Kan Naoto convened a meeting with the Fiscal System Council, a panel of advisors. According to Kyodo, he said:

Tax is not a burden (on the people) but a contribution. If we consider the appropriate (use of taxpayers’ money) with such a mind-set, it will lead to economic growth.

There you have it. It’s just not true that every yen the government spends was taken from people who had other plans for that money. The people are really making a contribution out of public spirit.

Mr. Kan is unlikely to ever understand that concept, however. That would require the mind-set that government funds aren’t his money to begin with. Here’s what he also said at the meeting:

I wish (the panel) will discuss how to strike a balance between boosting the economy and restoring fiscal health.

Shirakawa Masa'aki

In other words, it’s the Hatoyama administration’s position that economic growth can be created even when taxes are raised. He’s asking the panel to figure out a plausible explanation for why arithmetic shouldn’t work any more..

But they won’t have to fabricate a modern fairy tale if they start digging. They could take a tip from the BOJ governor instead and look to Europe. For example, the European Court of Auditors hasn’t given official approval to the EU balance sheets for 16 consecutive years, citing “unacceptable levels of illegality and irregularity”. In fact, the COA admitted in 2006 that “80 per cent of all taxpayers’ money is never properly accounted for.”

Ah, but Japan still has plenty of leeway before it reaches that point.

Here’s an idea: Why not take a tip from Mao’s China and have these guys contribute by enrolling them in a re-education program while doing agricultural work? We could call it a work-study scheme. After a day spent mucking about in the paddies, they would start on the first item on the syllabus, this brief article called The Economic Cost of High Tax Rates, by Robert Carroll. It’s about the United States, but the lessons still apply. Such as:

What is critically important from the government’s perspective is that while it collects an extra 10 cents for every dollar subject to the higher rates, it loses over 45 cents for every dollar by which reported income falls due to taxpayers working less or otherwise reporting less income.

Mr. Carroll concluded:

High tax rates carry economic consequences. They cause taxpayers to base decisions more on tax considerations and less on economic merit. They also can be expected to shrink the size of the tax base and raise less revenue than the casual observer might assume. Another important consideration is the substantial effect the higher tax rates will have on the entrepreneurial sector, whose business income tends to be subject primarily to the individual income tax.

After they’ve digested that information—assuming they were still awake in the evenings after what would surely be their first experience with serious manual labor—they could move on to the next item on the syllabus, an article by Tyler Cowen that appeared in the New York Times:

The most potent way to add revenue is to impose a value-added tax. As its name indicates, a V.A.T. takes some percentage of the value added at each stage of production. V.A.T.’s raise money so readily and so invisibly that they often climb to a range of 15 to 20 percent; politicians like the revenue, and voters don’t always notice the burden. A move toward a V.A.T., however, also brings price inflation, a big increase in the tax-collecting bureaucracy and the emergence of favored sectors with exemptions or lower rates.

One member of the current government suggested that the consumption tax should be raised to double-digit levels, but to less than 20%. See what Japan has to look forward to with all that leeway?

Burdening citizens with much higher taxes would fundamentally change what this country is about.

Professor, please! It’s not a burden, it’s a contribution.

Prof. Cowen suggests looking to Europe for inspiration, too:

The macroeconomic evidence also suggests the wisdom of emphasizing spending cuts.

Though the word “macroeconomic” will fly over the head of the Hatoyama government in general, and Mr. Kan in particular…

In a recent paper, Alberto Alesina and Silvia Ardagna, economics professors at Harvard, found that in developed countries, spending cuts were the key to successful fiscal adjustments — and were generally better for the economy than tax increases. Their conclusion was based on data since 1970 from the Organization for Economic Cooperation and Development.

The received wisdom in the United States is that deep spending cuts are politically impossible. But a number of economically advanced countries, including Sweden, Finland, Canada and, most recently, Ireland, have cut their government budgets when needed.

Most relevant, perhaps, is Canada, which cut federal government spending by about 20 percent from 1992 to 1997….In his book “In the Long Run We’re All Dead: The Canadian Turn to Fiscal Restraint,” Timothy Lewis describes Canada’s move from fiscal irresponsibility to a balanced budget — a history that helps explain why the country has managed the current global recession relatively well.

None of us has any way of knowing whether the students would be capable of assimilating the teaching material of this work-study program. It’s difficult to reorient the thinking of people who believe that the individual exists for the state, rather than the other way around.

Still, it might be worth a try. It’s about time they made a contribution to us for a change, instead of us making a contribution to them.

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