Noda Administration May Be Planning to Use Sales Tax Proceeds for Large Public Works Projects

Liar, liar, pants on fire!

The Noda administration has successfully pass the legislation to increase Japan's sales tax from current 5% to 8% (then to 10%) with the help of the opposition parties, and the ostensible reason was to "reform and improve the public safety net".

It was BS as it stood, because the money will be taken from the very people Prime Minister Noda says he wants to help. Now, according to Tokyo Shinbun, the administration has much better use of the money that they will have: public works.

Ah. Good old trusty public works that have never succeeded in lifting Japan from the two-decade-long economic stagnation (dubbed "Lost Decades") but have helped in keeping the biggest general contractors in business.

But if you read the article, it's totally illogical. It goes like this:

1. Let's raise sales tax, everybody pays this tax for everything they buy.

2. Lots of money will fill the government coffer. No need to issue government bond to pay for the social services any more!

3. So, the debt (government bond) not issued (because the sales tax covers the cost, supposedly) is the new money created! (No it is not, but you can't argue with politicians.)

4. Let's spend that "money" on public works!

Only in the last bastion of John Maynard Keynes.

My quick translation of the Tokyo Shinbun article (7/30/2012):

A curious discussion has been going on in the Upper House special committee on the simultaneous reform on social security and taxation. The main topic of the discussion is whether to use the extra breathing space from the sales tax hike in public works. All of the money from the tax increase is supposed to be used in providing social security. But if we listen to the discussion, it is almost like "simultaneous reform on taxation and public works".

In the committee meeting, the Councilors from Democratic Party of Japan (DPJ), Liberal Democratic Party (LDP) and Komei Party keep repeating, "We should increase the budget for public works because the public works protect the life and living of the citizens." The basis of their argument is the revised regulation that the three parties agreed on in June, "Addendum 18 Item 2".

It says, "Considering the effect of the sales tax hike on the economy, the fund will be specifically allocated to the growth strategy and areas like disaster prevention and disaster mitigation."

If the sales tax is raised to 10% and additional 13.5 trillion yen is in the government coffer, that will decrease the amount of government debt to pay for the social security. So why not use this extra spending power [what's "extra" about this?] in public works for disaster prevention and such? That seems to be their thinking. Prime Minister Yoshihiko Noda is sympathetic to the idea, saying "If the economy grows and tax revenue rises, disaster prevention and disaster mitigation will be the priority for added funds."

The government has been explaining that the purpose of sales tax hike is to achieve both the reform on social security and the fiscal reform simultaneously.

Money is fungible, but if the money from the tax hike is diverted to public works, the fiscal reform will be delayed, and additional tax hike may become necessary. What is the point of the sales tax hike then?

The point of raising sales tax is, because they can, and they want to look good in the eyes of IMF. And because the citizens have long been pushovers (and the foreign residents have no say).

If the economy grows? PM Noda expects the economy to grow by raising tax for the constituency that has no power - individual taxpayers. Japan's large exporters will benefit from the sales tax hike, and they will receive extra credits. I suppose Mr. Noda is not counting on the Japanese citizens and residents to spend money to expand the economy.

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Japan to Raise Sales Tax from 5% to 8% (then to 10%) in an Effort to "Boost Economy"

That is what the politicians in the Noda Administration have been saying. Does that make sense? I don't think so. But nothing Japan has done, particularly after March 11, 2011, makes much sense.

Their reasoning is that people will increase their purchase significantly before the increase goes into effect in 2014, therefore boosting the economy. (Amateurs...)

It was not just DPJ (Democratic Party of Japan, ruling party) but LDP (Liberal Democratic Party which is nothing liberal or democratic) and Komei Party voted in favor of raising the sales tax from the current 5% to 8%. About 50 DPJ politicians, many of whom are aligned with Mr. Ichiro Ozawa, voted no.

The ostensible reason given to the Japanese for the tax hike is to pay for increasing costs for welfare and medical benefits for the elderly as the government reform the welfare system and the tax system. But there are only vague words of "reform", and the benefit for the elderly will be further decreased. There is no corresponding decrease in personal income tax, and there is no exception (such as on food items). In fact, personal income tax will be RAISED for the next 25 years to pay for the great "recovery" from the earthquake and tsunami.

Big corporations, particularly large exporters, are very pleased with the sales tax being raised. It won't hurt them, as they will continue to get tax refunds for the overseas sales if the products are made in Japan.

From Bloomberg News (6/26/2012):

Japan Sales Tax Risks Growth Grinding to Halt in 2014: Economy

Japan’s Prime Minister Yoshihiko Noda risks stalling the economy by pushing through a higher sales-tax that may damp consumption even as it aids efforts to tame the world’s largest debt burden.

The nation’s recovery after last year’s earthquake and tsunami could grind to a halt in 2014 when the first increase will take effect, according to UBS AG and Itochu Corp.

Parliament’s lower house yesterday approved the bill to raise the tax to 8 percent and then 10 percent in 2015 from 5 percent now. A slump would be a repeat of 1997, when an increase in the same levy contributed to pushing the economy into a 20- month recession, costing then Prime Minister Ryutaro Hashimoto his job.

“If there are no economic stimulus measures along with a consumption tax hike we can see around zero percent growth in fiscal 2014,” said Takuji Aida, a Tokyo-based economist at UBS, who raised his growth forecast for the year ending March 2014 to 2.9 percent from 2.2 percent because he sees a 4 trillion yen ($50.4 billion) rise in consumption and investment ahead of the tax increase.

A 1 percentage point increase in the tax would cut growth in real gross domestic product by 0.32 percentage point in the year after implementation, according to the Cabinet Office’s Economic and Social Research Institute.

Growing Debt Burden

Even with the sales tax increase, the government said in January that it will probably miss its goal of achieving a primary balance surplus, which excludes debt servicing costs, by fiscal 2020. It forecast a primary deficit of between 1.9 percent and 3.1 percent of GDP in that year, compared with the fiscal 2011 deficit of 7.4 percent.

Gross public debt will be 223 percent of GDP next year, up from the projected 214 percent in 2012, “pushing Japan’s public finances further into uncharted territory,” the Paris-based Organization for Economic Co-operation and Development said in a report last month.

Japan’s benchmark 10-year yield was 0.805 percent at 12:50 p.m today. It reached 0.79 percent on June 4, the lowest since June 2003 and the least globally after Switzerland’s. Five-year credit-default swaps for Japan’s bonds were 94 basis points yesterday, having slid 12 basis points since Noda took office in September, data compiled by Bloomberg showed.

The yen was trading at 79.44 to the dollar at 12:45 p.m in Tokyo, having strengthened more than 5 percent since mid-March. The Nikkei 225 Stock Average was at 8,707.64, down about 14 percent over the same period.

“Higher taxes will automatically shore up tax revenues even though an accompanying economic slowdown will somewhat reduce the amount collected,” said Hiroshi Watanabe, a senior economist in Tokyo at SMBC Nikko Securities. “Even so, Japan must raise the consumption tax to 16-17 percent if it wants to eliminate the budget deficit with taxes alone,” he said, adding “the government simply has to slash spending.”

(Full article at the link)

Mr. Watanabe has apparently never heard of the "Laffer curve".

Sales tax of 15% is what Christine Madeleine Odette Lagarde, IMF chief who pays no income tax on her IMF salary, recommends for Japan.

Prime Minister Noda probably couldn't care less about the angry public protesting outside the Prime Minister's Official Residence against the restart of Ooi Nuclear Power Plant. He got this tax increase bill passed, with the overwhelming support from the major parties. Ooi Nuke Plant may have served as an excellent diversion.

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National Sales Tax???!!!

Just when I thought things couldn't go any worse, they do, and these days that happens almost every single day. Today, it is this headline from Washington Post.

Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look

"With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

"Common around the world, including in Europe, such a tax -- called a value-added tax, or VAT -- has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity."

Fiscal calamity of their own making, and what does the government do? Come up with a new, equitable tax, of course. For what purpose? For the latest plug from the White House and lawmakers: health care.

"A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American -- a tangible benefit that would be highly valuable to low-income families. "

""Everybody who understands our long-term budget problems understands we're going to need a new source of revenue, and a VAT is an obvious candidate," said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. "It's common to the rest of the world, and we don't have it." "

It's common and we don't have it, so we'd better have it? Mr. Burman also thinks 25% VAT "should do it all..."

"And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent. A gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250, but the nation's debt would stabilize and everybody could see a doctor. "

And here's a kicker for me in the article:

"And the threat of a VAT could pull the country out of recession, some economists argue, by hurrying consumers to the mall before the tax hits."

A value added tax will pull the US out of recession! Please tell me then why Europe, with high VAT, has stagnated economically all these years.

The article also tells us that Obama's budget director at the White House has hired the brother of Obama's Chief of Staff, Rahn Emanuel. He is a VAT advocate, and he will advice the budget director on "health care" issues.


In my area (a county in California) we already have state/county sales tax that amounts to almost 10%. Does that mean the total sales tax would double overnight with the introduction of national VAT? (I don't see how the state can let go of this steady revenue source.) So that the federal government can provide health care for all Americans? Whether Americans like it or not? This is too unreal for the morning.

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