Japan from the inside out

Horse feathers

Posted by ampontan on Thursday, July 29, 2010

The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could be safely trusted to no council and senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.
– Adam Smith

A COMMITTEE OF EXPERTS in the Cabinet Office’s Tax Commission released on 22 June an interim report on amending the tax code. The commission is under the direction of Finance Minister Noda Yoshihiko, and its offices are located in the Budget Bureau of the Finance Ministry (i.e., the control tower of the Japanese administrative state). The report is calling for tax increases—in a deflationary period—and justify them this way:

It is an important task to arrest the spread and the growing permanence of income gaps in order to realize a society in which the people can live with peace of mind. Therefore, it is an important task to restore the redistribution function of the tax code in conjunction with the social security system…To achieve this, it will be necessary to implement reforms that return to the progressive structure of taxation for income and assets, and restore the redistribution function of the tax code.

Every word of this is horse feathers, including the “a”s, “and”s and “the”s. This is not a country in which people are dying of malnutrition in the gutter while toffs in top hats and tails laugh and look the other way. Though that comic book vision may have informed the politics of many DPJers when they were younger, they’re much more comfortable nowadays in karaoke sing-alongs with the background music provided by a television commentariat plucking the heart strings to play variations on a theme of income gaps and society’s weaklings.

Income taxes in this country are neither particularly low nor unfair. The top rate is 40%, equivalent to that in Britain and France, and higher than the current 35% in the United States. If local taxes are factored in, the highest rate climbs to 50%.

In any event, it is not the business of government to take upon itself the adjustment of any income gaps based on proper economic activity, nor would it be possible to do so, considering the eternal gaps among individuals and the groups they form in effort, abilities, and intelligence—all of which are evident as early as grade school. It’s even possible to observe the behavior of teenagers in a shopping mall to get a rough guide as to which end of the gap they’ll wind up on in adulthood. Which kids are browsing software and computers, and which kids are spending their time and their dimes in video game centers?

The only business of government is to see that economic activity is conducted honestly and within a legal structure that minimizes group privilege. Well, that, and to incorporate into their thinking consideration of events overseas, such as the reasons the Berlin Wall no longer exists, and why most of the countries that were on the eastern side of it have moved to flat or flatter taxes and away from the failures of the “income distribution function”.

Here’s how they’re planning to go after assets:

While financial assets are concentrated among the elderly, the income of young people is declining. Therefore, it is important to redistribute (those assets) between the groups…From the perspective of correcting these income gaps, the objective of tax reform for FY 2011 should be to expand the base of taxation by lowering the basic deduction for the inheritance tax and reexamine (i.e., change) the structure of tax rates.

Individual assets in Japan total roughly JPY 1,450 trillion, about 75% of which are held by people over 50. If the penalties for passing along one’s assets to one’s heirs are removed, as happened recently in Switzerland, Italy, Sweden, Canada, Australia, and New Zealand when those countries eliminated the inheritance tax, it is redistributed to the younger generation naturally.

According to the Economic White Paper for Small and Medium-Sized Business Enterprises of 2006, 70,000 of these companies go out of business each year—and an estimated 200,000 to 350,000 people find themselves without a job. The primary reason is that these businesses can’t be passed on to a younger generation, even if the younger generation wanted them (or decided to accept them and sell them to someone who did). The inheritance taxes are already so high they’d have to liquidate the assets of the business to pay them.

Now, the DPJ government wants to make that worse, all to provide for equality of result rather than equality of opportunity.

What has gone unremarked in Japan is the sheer arrogance required to claim that the old must have their assets redistributed, like it or not, to the young, and that anyone in government is capable of efficiently handling this task. Were not those assets accumulated by people to provide for themselves in old age? Are the eternal virtues of diligence and thrift to be nullified by political fiat and replaced by an airy, vague assurance that the government will probably take care of them too?

When Mr. Noda was deputy finance minister, he told a business magazine:

I’ve thought there must be no move to deny individual assets in a country based on liberty. If the assets created over three generations disappear, wouldn’t that be because individual assets were confiscated?

Even some people in the economically dimwitted Obama administration in the United States understand this. Christina D. Romer, the Chair of the Council of Economic Advisers, and her husband David H. Romer of the UC Berkeley Department of Economics recently published The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks.

Here’s an excerpt from the abstract:

This paper investigates the impact of tax changes on economic activity…The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.

In simpler language:

Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly 3 percent. The effect is highly significant.

Of course Mr. Obama will ignore it, as will the DPJ and the Japanese Finance Ministry. Empirically based economic policy is not the forté of politicos on the left, and they share with the bureaucrats a taste for scenarios involving secular political divinities with themselves in the lead role. Why be a bureaucrat or politician if you don’t have manna-money to spread around?

The Japanese thought the 1990s were 10 lost years. If the DPJ working with the Finance Ministry has its way, they’ll be losing a lot more than a decade this time.

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11 Responses to “Horse feathers”

  1. Roual Deetlefs said

    You cannot have liberty and equality in the same system. One must always be subverted to strengthen the other. This means that if your goal is equality for the people, then you must necessarily hamper their freedoms. And if your goal is freedom, then you must realize that people will strive for inequality, and that means the pursuit of success.

  2. Fat Tony said

    Well that’s nice. Or you could just accept that the decision to, say, impose a tax can be a reflection of political goals, not just economic ones. To present the free market as objectively beneficial to society is about as outdated as thinking that kids who play video games are going to grow up as moochers. I used to play them, and I’m doing fairly well, thank you.

  3. Roual Deetlefs said

    … what’s the alternative Fat Tony ??? … communism … theocracy … this present socialist system ??? Any one of them can work actually. As long as the best and most capable individuals of every generation is given fair and ample opportunity to change their station in life. Which is why Dynastic China was generally very stable. Everybody could get a lucrative government job, provided they passed stringent entry exams.

    That and until a government reaches a point where expenditures exceed tax income, and the option of reducing spending is impossible, because of a large government client base that lives off government spending. No government has ever produced wealth for an economy, governments just tend to redistribute it.

    When a government reaches this point it must borrow the money it needs, but that only works for as long as their bond market trusts the credit of the government. Look at Greece. The riots in their streets were preceded by riots in their bond markets long before Greece became news.

    Otherwise the government can raise taxes, but look at Russia that overhauled their tax regime after they went bust in ’98. They actually lowered their taxes and simplified it as well. Their economy boomed to such an extent, that they have the money to buy gold right now.

    Hong Kong has had such a tax regime for years, and one of the major reasons China is doing so well, is because they have low to no income taxes. When Reagan cut taxes in the early 80’s US tax receipts actually increased. Same with Bush earlier this decade. Economists coined this phenomenon the Laffer Effect.

    But yes, raising taxes can raise government revenues. And then governments raise taxes even more. And suddenly tax revenues start to decline. And that is due a fundamental law of economics called diminishing marginal returns. Or in layman’s terms when taxes become onerous, the populace begins to embrace the three F’s : Fight, Flight, Fraud. Look at how Rudd lost his premiership in Australia due to his windfall profits tax. A similar tax was tried in Canada in the early 80’s on oil companies, but there the tax receipts actually declined.

    And then, the only other option left is to just print the money then. And if you support that, well there is a Reserve Bank Governor in Zimbabwe that would really like to meet you.

    And who knows, maybe you’ll meet him and then play video games together.

  4. Fat Tony said

    “what’s the alternative Fat Tony?”

    People who ask that question are looking for a quick answer that will solve all problems of social organization. The alternative to an unrestrained free market is not “Zimbabwe.” The alternative is to reject such nonsensical dichotomies, accept that absolute solutions end up satisfying very few, and embrace pragmatism. The free market works in some areas and in some situations. I certainly wouldn’t want the government determining the books that people should or shouldn’t be allowed to buy, for example (although in extreme cases that does happen). But that doesn’t mean I want to apply libertarian principles to the whole of government.

    Take your Laffer effect for example. It may well have worked in the 1980s because taxes were so high that there was substantial behavior that constituted avoidance or evasion. With more reasonable tax rates people started paying the tax that they owned. It’s questionable whether the amounts proposed today in tax cuts would have the same effect, because enough people are paying at the more “reasonable” rate. Indeed, if you think about the Laffer effect in terms of lower taxes = greater compliance, it probably holds, but if you take it to mean lower taxes = greater revenue, it simply does not. With zero taxes, there is 100 percent compliance, but zero revenue. The problem for the politician – if we are speaking strictly in terms of the Laffer effect – is to find the point in the Laffer curve where revenue maximization is highest and taxes are lowest. That will change with time and it will be a highly political, and therefore to some degree subjective, question. It will not simply be a question of ever-lower taxes increasing revenues ad infinitum.

    So you can sit around gnashing your philosophical teeth. You can repeat tired cliches like the one about about equality of opportunity, as if equality of outcome had no impact on this, or you can join real-world political discussions. Your choice.

  5. Roual Deetlefs said

    Regarding the non-linear relationship between equality of opportunity and equality of outcome, one should also take into account a non-linear relationship between equality of ability, and equality of ambition. I don’t think all individuals of similar abilities have similar levels of ambition, or type of ambition.

    And when your “hard” conditions meshes with my “soft” conditions there can be discontinuities in the supply and demand curve of whatever market or situation this describes. And the arbiter has been and always will be price … a free market price … which is ultimately a distillation of the cost of effort.

    I found it quite amusing to see normal mechanics earning less money than diesel mechanics, but the training is oh so alike. But that is South Africa for you.

    Your lower taxes = more compliance vs my lower taxes = more revenue is true if every country’s economy is viewed as a closed system. But there is also the matter of foreign investment. A high-tax over-regulated jurisdiction, with a penchant for double taxation treaties ,will attract less investment than a jurisdiction that has none of these things. Not to mention the few jurisdictions that wants to tax an entity on all worldwide earnings like Japan, the USA and yes, even South Africa.

    This can be negated by movements in the forex market, but what businessman has the savvy to consistently beat movements in that market ? Metallgesellschaft and Enron were but two companies that tried to negate currency volatility in the cost of their inputs.

    So yes, lower taxes = more foreign investment + more local compliance = more tax revenue , if currency exchange rates are stable, or fluctuate in favor of foreign investment. ( And yes, there is a limit to this )

    Can this go on forever ? I doubt it. Every boom has the seeds of its own destruction. But after this Great Financial Crisis is over, this is what needs to be done. Will it happen sooner ? I doubt it.

    The pragmatism that you want in politics, will be preceded by paramnesia, protest, perplexity and panic.

  6. Roual Deetlefs said

    FYI …

  7. […] are elitist foreign cunt bloggers who try to impose their anti-Japan vision on the world. Take this clown named Ampontan, for example. He writes against tax reform in Japan, saying, “This is not a country in which […]

  8. Roual Deetlefs said

    … Your Majesty the King of Japan … buggeroff !!!!

  9. M-Bone said

    That King of Japan thing has GOT to be a (unfunny) parody –

    “Japanese firms would never discriminate against employees for any reason, by definition. The word “discriminate” is an English word, not a Japanese word.”

  10. Fat Tony said

    “Your lower taxes = more compliance vs my lower taxes = more revenue is true if every country’s economy is viewed as a closed system.”

    Of course it does, because local tax rates here are the only variable that is independent. There is the likelihood that if a nation lowers its tax rates so radically that it attracts a significant amount of foreign investment (nothing to do with the Laffer effect, but I’ll bite), say, enough to offset lost revenues elsewhere, that others will also lower their tax rates, especially if the first mover is a significant economy like the United States. That, one could argue, is what happened in the 1980s. Thus the effect of foreign investment is neutralized.

  11. Roual Deetlefs said

    Are you an economist Fat Tony ??? I don’t think I want to play video games with you . I might just loose, unless it’s Unreal Tournament 2k4 🙂 Anyway, the idea of competitive tax reductions can work. But look, at one of the G20 meetings last year where Sarkozy branded China as a tax haven with nuclear weapons. There was also a crackdown on low tax jurisdictions (tax havens) What you said about the 1980’s has the ring of truth, but this is what I see happening now. Before competitive tax reductions can come into effect, there will be some witch-hunts first, until all excess capital has fled to Asia.

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