Japan’s ruling Democratic party (DPJ) has taken a shellacking at the polls, leaving prime minister Naoto Kan the leader of a weakened minority government. Kan’s government is caught in a set of pincers that very probably will be felt by others, and soon: Japan’s sovereign debt is enormous, so large that it has been downgraded by S&P and is threatened by future downgrades. Hoping to close the deficit, Kan promised to double Japan’s national sales tax, from 5 percent to 10 percent. Unlike a VAT, which is largely hidden from consumers, Japan’s consumption tax, as I understand it, is imposed at the point of sale, so consumers feel it — and they are not eager to endure an even deeper bite:
Voters were apparently unhappy with new prime minister Naoto Kan’s recently announced proposal to double the consumption tax rate to 10 percent. This despite polls showing a majority of the public say such a measure is inevitable in order to fix the creaking state finances, and it also being the policy of the opposition LDP – Sunday’s main electoral beneficiary.
“I touched on the consumption tax and the public may have felt it came all of a sudden. I also believe that my lack of explanation about it was a big factor,” a tired and slightly shaken-looking Mr. Kan told a news conference in the early hours of Monday morning.
I’m not sure what kind of explanation would have finessed the fact that you’re doubling a tax rate. My impression is that the Japanese public can calculate the difference between a 5 percent tax and a 10 percent tax (these aren’t American public-school kids we’re talking about).
Kan is sticking to his plan, damn the voters: Given a choice between cheesing off the electorate and enduring the wrath of the credit markets after another downgrade, he bowed to the markets: After all, you can always throw taxpayers in jail if they refuse to give you money, but you can’t throw investors in jail if they won’t lend to you. Even Leviathan has to worry about his credit score. Those of you who are banking on a Social Security check in old age, or a non-confiscatory rate of taxation in the near-to-middle future, keep that in mind: When the choice is between voters and the credit markets, voters lose.
This is the conundrum: The credit-rating agencies want a tax hike, voters don’t. There’s a way around that problem — deep spending cuts — but nobody is talking seriously about that, in Japan, in Europe, or in the United States.
Even as Kan presses ahead with his tax plan, Japan may end up downgraded, anyway: Kan’s weakened government, the reasoning goes, probably is not in a position to undertake the difficult and unpopular measures necessary to restore fiscal rectitude. So the outlook remains negative.
Takeaway for U.S. policymakers: The science-fiction guys were right that the future looks like Japan. But it’s not William Gibson’s dystopia — it’s Ayn Rand’s.
Right, VAT is NOT "hidden." Everyone knows what a % charge is, even when calculated into the final consumer price.
Contrast the concept of a given VAT percentage with the Corporate Income Tax. Have any idea what the corporate tax is in anything you buy?
The ideal implementation of the VAT is revenue neutral (now) as a replacement for the corporate income tax.
Gone is the incentive for corporations to shift profits through transfer pricing to lesser taxed foreign subsidiaries. Gone is the double-taxation of dividends. And, the U.S. becomes more competitive in international trade.
The expectation of a VAT increase at time-certain in the future, say two years, after the economy begins to rebound, will serve to stimulate consumer purchases in the short-term, i.e., a no-cost stimulus.
For positive commentary and explanation of the VAT, and for experts in VAT, go to the
VAT-US.com website.
Steve Abramson, site manager
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Steve Abramson and other value-added tax ("VAT") supporteres are hopelessly naive.
The federal government will not repeal its corporate income tax when it enacts a VAT because it is very hungry for revenue and will never relinquish a tax once it is in existence. (Also, repeal of the federal corporate income tax would cause severe tax administration problems for the 49 states that impose a corporate income tax.) Instead, we will have both a VAT and our current federal corporate income tax after the federal government enacts a VAT.
The additional tax burden caused by a VAT will harm our economy as long as it is in effect, it will complicate the 46 state sales taxes that are already in existence, and will fund an expansion of the federal government. Congress wisely decided not to enact a VAT to help fund World War II and we should follow its example now by resisting all calls for a VAT. A VAT is poison for our country and we should refuse to drink.
Reply to this commentLinkReport AbuseI think Bowles tipped the commission's hand when he said the debt is "like a cancer." VAT is like chemo - it would be permanently, structurally damaging to the economy. Worse still, as cdscott1968 points out, it would replace nothing, but would only be added to current tax burdens.
A government whose annual deficit is now as large as the entire budget was as recently as 1997 does not have a revenue problem, it has a spending problem. Or, to use Bowles' analogy, it does not have cancer, it's just fat.
When you have cancer, you have no choice but to endure horrible, damaging treatments. When you are fat, you just need to stop eating.
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