Wednesday, August 13, 2014

Tax incident

Japan drastically raises its sales tax, and consumers cut back on spending;
Japan's economy contracted by an annualised 6.8% in the second quarter of the year, the biggest fall since 2011 when it was devastated by an earthquake and tsunami.
....The shrinkage was largely in response to a government sales tax, which held back consumer spending.
Japan's sales tax rose from 5% to 8% in April.
Hmmm. Haven't we been told that it's inequality that's a drag on the economy, and that higher taxes are the answer to alleviating that inequality?

1 comment:

  1. Japan is too timid to follow well understood monetary incentive theory.

    They are supposed to raise the sales tax from 5% to 8% and announce that the tax will be going up 1% every year for the next 10 years.

    Raising the tax only once suppresses spending. Foolish citizens hope to wait for lower taxes later. But, promising also to take more (and more) money in the future gives them the incentive to spend big now, creating a flood of wealth from spending and the spending multiplier. Isn't that the theory?

    Or, I suppose, foolish citizens might still spend less, figuring that they will need every dollar of savings to support themselves in the future, regardless of the higher taxes.

    And, who knows what foolish businesses might think? Produce more now to meet the flood of demand, or wait to see how much spending will be depressed in the future?

    Anyway, Japan only did half. Maybe they will follow sound policy to threaten higher taxes in a second phase.

    The real problem is that the citizens haven't read the models which describe what their incentives and reactions should be. Utopia would surely follow if they would only get with the program. Higher taxes are good in so many ways. Why won't they understand?