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Abe's advisers to propose income tax cuts to spur consumption

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Influential advisers to Japan’s top economic advisory panel will propose cutting personal income taxes to stimulate flagging private consumption, as Prime Minister Shinzo Abe prioritises growth policies with a recession looming.

Right, cut income taxes but raise the consumption tax.......

4 ( +7 / -3 )

Any increase in spending will be marginal at best. People will save their extra income because they are afraid to spend. The Abe administration is driving blind and the economy is becoming increasingly volatile. The only ones to gain from this are the wealthy.

6 ( +7 / -1 )

Tax the rich, Abe.

4 ( +8 / -4 )

@koiwaicoffee

Japan already takes the rich. Anyone that makes over 9 million yen after deductions pays 40%.

2 ( +6 / -4 )

I would rather see the ward tax cut. Mine seems to go up about 15% every year.

6 ( +7 / -1 )

It's really right advice of increasing disposable income to Abe's government. Japannse economy is really in need of effective demand. I wonder why Abe's government is not adopting anti-deflationary policy. It is a high time to accelerate the sluggish economy through such a policy measure.

0 ( +1 / -1 )

Anyone that makes over 9 million yen after deductions pays 40%

No. Anyone who makes 9 million after deductions pays 15.9%, progressively more as the income rises.

https://www.nta.go.jp/taxanswer/shotoku/2260.htm

The chart says the rate is 33% for incomes between 9 and 18 million, but there is a ¥1,536,000 deduction.

So the actual tax payable is 9,000,000x0.33-1,536,000=1,434,000. In other words, 15.93%.

To be liable for 40% income tax you need to be earning over 18 million, and it isn't 40% of course;

18,000,000x0.4-2,796.000=4,404,000, or 24.47%.

9 ( +13 / -4 )

The private-sector advisers will also propose a raft of steps including vouchers to support child-raising.

Vouchers not cash! Already mooted for low income workers. Japan is becoming more socialist everyday! Raise the minimum taxable income to two million yen and let people live a life instead of an existence of indentured slavery.....

1 ( +2 / -1 )

i'm all for a tax cut because the gov't is wasting enough of my money on pork barrel projects and other useless gov't programs. but realistically, this won't move the needle much. until workers feel that there is a better tomorrow, then they will mostly save any extra income for a rainy day. this has been the japanese mindset since the bubble burst, and an income tax cut will do little to change it.

6 ( +6 / -0 )

As long as this slugging atmosphere lingers on, income tax cuts do little but have people save money.

3 ( +4 / -1 )

One other perspective is 'value for money' - taxes have gone up, and what have we gotten in return? More? Not much more?

Tax cut offers always win votes, and then after the election people are concerned why services are cut. The link isn't that difficult, but as a few commenters have highlighted - tax in Japan is a secondary conversation as to where all that tax (and added borrowing) goes to.

That is the question people should ask. Certainly, there is OECD data and such, but people need to push their questions more of where is this money going?

4 ( +4 / -0 )

@cleo

Anyone who makes 9 million after deductions pays 15.9%, progressively more as the income rises.

No only that, but small - medium business owners "pay" themselves the absolute legal minimum, whilst putting their actual earnings through their companies. That way, they're only paying a fraction through corporate tax. Even CEOs of large companies have a workaround for this.

Abe's corprate tax cuts have really made the rich much richer. The middle class have been slammed by increased sales tax & lagging wages.

5 ( +6 / -1 )

You just kind of want to bang your head when you see how ridiculously incoherent government policy is. If they want to use tax cuts to promote consumption the most efficient, direct and plain obvious way to focus those cuts would be on the consumption tax itself. Cutting the consumption tax means that 100% of the tax savings will be realized by taxpayers through the specified goal of the cut (increasing consumption). It thus provides a direct incentive to taxpayers to actually consume.

Cutting income taxes to increase consumption is way less effective because it doesnt incentivize people to actually consume - presumably a large part of the tax savings will just go into peoples bank accounts as savings rather than being spent. Its way less efficient at achieving the objective. They get the tax savings regardless of whether they actually spend the money or not, so its just not as useful a tool for spurring consumption as a consumption tax cut would be.

But yeah, lets just go ahead and increase rather than decrease the consumption tax because the government prioritizes government revenue over consumption, then decrease rather than increase income taxes because the government, uh, prioritizes consumption over government revenue.

Everyone got that? This is literally how convoluted and self contradictory this government`s policy debate has become.

8 ( +9 / -1 )

The elderly have been given a bribe in the form of a lump sum, now it's time for workers to be paid to vote for Abe in the double election. And I thought vote buying was illegal.

I've been wondering why Abe would delay the next consumption tax rise, other than him being an opportunistic coward. He claims he wants 2% inflation and a 2% rise in consumption tax would produce exactly that.

1 ( +2 / -1 )

So, income tax for slaves is only around 7%. How much will they cut it by? Half a percent? As stated above, tax the rich and stop bleeding the 95% of middle class and poverty stricken masses to keep your friends rich and the masses poor!

-1 ( +3 / -4 )

I still hope the other parties gains seats (even if it is still a minority in sum) to balance the LDP's arrogant "mandate". If there is a cut I hope the raise the amounts workers can make for a given tax bracket (thus lower income taxes for all workers).

2 ( +2 / -0 )

There are competing objectives at work. One is to gather tax revenues to pay for government services and other such wealth transfers. Another is to have the economy grow and make everyone better off.

But the total policy mix needs to be right for any individual measures to be effective.

Higher taxes on both income and consumption will theoretically result in less income and consumption. If taxes are conversely to be cut to further the 2nd objective, what is needed desperately in Japan to make that measure effective is for government to cut its spending down to size as well.

With government spending currently some 40% in excess of tax revenues, and a shrinking population, there is little hope for increased economic growth through lower taxes alone to help plug this massive hole in the budget. If the government refuses to cuts its spending, people will look at any tax rate cuts as being temporary, and continue to save the money.

Here, where the working population is shrinking relative to the non-working population, I believe it makes very good sense to reduce income tax and make up for it with higher consumption tax (if it is simple, and broad based), which non-income earning RICH tax residents need to pay. This would be a revenue-neutral change in the structure of how taxes are gathered.

If people don't like the resulting overall tax burden and/or way the government spends the money, the answer is to chop government spending down to size, or prioritize spending / wealth transfers so that the most vulnerable get the benefits. (Frankly, this government gives wealth transfers to too many wealthy people who don't need it.)

Also I'd note that in Japan income tax is separate from those other levies that are subtracted from one's salary. Salaried workers can glance at their pay slips to see it. Whether it's an income tax or some other social insurance levy, it's all money that workers don't get to take home.

0 ( +3 / -3 )

Here, where the working population is shrinking relative to the non-working population, I believe it makes very good sense to reduce income tax and make up for it with higher consumption tax (if it is simple, and broad based), which non-income earning RICH tax residents need to pay. This would be a revenue-neutral change in the structure of how taxes are gathered.

The way you are proposing it the bulk of the burden would fall on poor working people rather than wealthy retirees. Regardless of how one structures an income tax cut, it wouldnt benefit the working poor very much as they dont pay much income tax at all to begin with. If you extended the income tax cut to the well-off, it would obviously disproportionately benefit them. At the same time since poor people by necessity spend almost all their income, any increase in the consumption tax would really hurt them since it would be a tax increase that was effectively levied on almost all of their earnings. Such a tax increase would impose much lower burdens on upper income earners/ wealthy retirees since most of their money goes into savings/investments which aren`t subject to the consumption tax.

Also, as I mentioned in my earlier post, raising the consumption tax would obviously create a disincentive to consumption which a corresponding cut to income tax would not off-set. It would just contribute to the country`s deflationary problems and damage the real economy.

1 ( +3 / -2 )

Some people don't even have an "income"...

4 ( +6 / -2 )

Abe's corprate tax cuts have really made the rich much richer. The middle class have been slammed by increased sales tax & lagging wages.

AFIK the first bit of the corporate tax cut came into effect of 1 April (three days ago). I rather doubt that this cut has yet had time to really make the rich much richer.

-3 ( +0 / -3 )

Its hard to come up with a cut in income tax that will not disproportionately benefit higher earners. In other words, this may compensate higher earners for the increase in consumption tax, but it won't for lower earners.

fwiw, some of Japan's highest earners get their income from real estate portfolios, not from what most people would regard as "hard work".

2 ( +3 / -1 )

A 55% marginal tax rate is one of the worst in the world. They need to cut it to encourage risk taking and entrepreneurs.

0 ( +1 / -1 )

Good Catch by Cleo.

A lot of people misunderstand something as simple as marginal tax rates.

0 ( +1 / -1 )

i wonder how government expects people to spend while their personal taxation goes up, is there serious gap in robust common sense.

5 ( +5 / -0 )

rainyday,

The way you are proposing it the bulk of the burden would fall on poor working people rather than wealthy retirees.

My proposition is the opposite. Wealthy retirees who no longer earn income don't pay much income tax, but might consume a lot, say when they buy a new second home. The higher the consumption tax is, the more they will pay, and the lower the income tax burden of the workers needs to be as a result.

Regardless of how one structures an income tax cut, it wouldnt benefit the working poor very much as they dont pay much income tax at all to begin with.

Nor would they consume much to begin with, right? That's why my proposal above suggests that if people are unhappy, the government should reprioritize its wealth redistribution so that the poor folks who need it get the dosh, and the rich people who don't need it, don't.

If you extended the income tax cut to the well-off, it would obviously disproportionately benefit them.

That's not right - you've only considered the income tax cut in isolation. But one has to look at the whole package.

For example, if the government cuts income tax rates, but slashes handouts for the wealthy people, then they could be worse off. Take the income tax rebate available for those who are rich enough to buy a house by taking out a near zero interest rate loan, which is worth 5 million yen over 10 years for some people. Do people who are rich enough to buy a house in the first place need the 5 million yen more than the working poor? I would argue not, and suspect you will agree.

Instead of giving the 5 million yen to one rich person, how about splitting that up and giving a slice to many poor people instead? As a result, the poor could end up better off! Even with the higher consumption tax. And rich people consume a lot (like when they buy a new house and all the furnishings for it), so they'll pay more.

Such a tax increase would impose much lower burdens on upper income earners/ wealthy retirees since most of their money goes into savings/investments which aren`t subject to the consumption tax.

Tax rates for investment income and income from salary are actually different again. But taxing investment more would mean lower investment, and thus less good new jobs for poor working people, so that's not such a great approach either, IMO.

raising the consumption tax would obviously create a disincentive to consumption which a corresponding cut to income tax would not off-set. It would just contribute to the country`s deflationary problems and damage the real economy.

I agree, but every tax is bad like this. It's a choice of poison. This is why I think it is important for there to be a single tax rate, rather than different rates for different things as decided by the lobby groups. If the tax rate is uniform, the overall rate can be kept low, and thus the disincentive to consume any given item is even and minimal. With multiple rates, the higher rates that are required as a result create more disincentive than would otherwise be the case.

But again, the critical point is that the complete system needs to be looked at. Encouraging more work and investment by lower income tax makes sense, and eliminating welfare for the rich as I have proposed could ensure that government revenues are available to go to the poor to compensate for higher a consumption tax rate (which rich people pay a lot of as they consume more than poor people - like when they buy a house or whatever). The consumption tax is just a necessary evil to gather revenues, and it should not be thought that rich people won't pay a lot of it, because every time they buy a big ticket item like a house, they will. I hope I have convinced you!!

-1 ( +2 / -3 )

fxgai, you seem to have a bit of a thing about rich people buying houses and getting tax rebates.

The 住宅借入金等特別控除 (special tax rebate for home purchase loan) is otherwise known as the 'my home' rebate; it applies only to the house you buy to live in, not for the second holiday homes or villas that you are imagining your rich people are buying on a monthly basis.

People with a total annual income in excess of 30 million yen are not eligible for the housing rebate.

The house/apartment has to have a floor space of no more than 50 square metres - again, the spacious abodes of the stinking rich are not eligible.

https://www.nta.go.jp/taxanswer/shotoku/1213.htm

With your suggestions, the rich will simply continue on their merry way buying houses and conspicuously consuming left, right and centre, while Mr and Mrs Taro Average who have been scrimping and saving for a deposit on a modest house will find themselves without their tax rebate to take some of the sting out of the mortgage repayments, or more likely priced out of the market and with less chance than ever of getting on the bottom rung of the housing ladder because more of their limited income is being taken in the form of consumption tax on basic necessities.

A poor show all round.

2 ( +3 / -1 )

Nothing says leadership like taking a problem that really has very little to do with income tax rates and trying to present it to be entirely about income tax rates just before a big election.

1 ( +2 / -1 )

Cleo, may I suggest one correction to your post? The law actually says "newly built, or having floor area more than 50 square meters" (新築又は取得をした住宅の床面積が50平方メートル以上であり)

...so it's even less kind to lower- and middle-class city-dwelling couples who want to buy their first starter home, which would probably be smaller than that (mine is only 38 m^2) and would not be newly-constructed. It is the smaller abodes of such non-elites that are not eligible.

So this system is yet another advantage given to the top 5-10% of society, who would never buy a small apartment and who might have the money to splurge on new construction. The construction industry certainly has their hands in this, too.

5 ( +5 / -0 )

My proposition is the opposite. Wealthy retirees who no longer earn income don't pay much income tax, but might consume a lot, say when they buy a new second home. The higher the consumption tax is, the more they will pay, and the lower the income tax burden of the workers needs to be as a result.

With all due respect, this is just not how things work. The wealthy might end up paying more in absolute terms (as they do now anyway), but in terms of the proportional burden on their personal finances the working poor will be way worse off under your proposal for the exact reason I outlined above: a rise in the consumption tax on people whose entire earnings must be spent to support themselves (ie working poor people) is a de facto tax on 100% of their income. For a wealthy person who for example only spends half of their earnings supporting themselves while throwing the rest in the bank (which is what most higher earners do, not literally in a bank but into some form of investment), such a raise only represents a tax on 50% of their earnings. This is a horrible thing to suggest.

Nor would they consume much to begin with, right? That's why my proposal above suggests that if people are unhappy, the government should reprioritize its wealth redistribution so that the poor folks who need it get the dosh, and the rich people who don't need it, don't.

Under your plan they would be paying more in consumption taxes, so their ability to consume would be less than it is now. This is not a good thing. Again, for reasons I explained above, your plan if ever implemented would, as a matter of simple economic fact, constitute a lessening of the relative tax burden on the wealthy and an increase in the burden on the poor.

That's not right - you've only considered the income tax cut in isolation. But one has to look at the whole package.

Actually it is right. Its great to consider tax as part of a broader policy package, but for reasons I`ve outlined above, your ideas specifically on tax amount to nothing more than a shifting of the burden from the wealthy to the poor.

And as the above commenter cleo points out you dont seem to understand how that rebate system works so Ill skip addressing what you wrote about that.

Tax rates for investment income and income from salary are actually different again. But taxing investment more would mean lower investment, and thus less good new jobs for poor working people, so that's not such a great approach either, IMO.

Not sure about the tax treatment of investment income under Japanese law, but in most jurisdictions it is taxed at the same rate as salary income, except for capital gains.

I agree, but every tax is bad like this

Actually no. For reasons I again pointed out above, not all taxes are equally bad in this regard. If the goal is to increase consumption then reducing the consumption tax rate is clearly the most effective way of doing this. This again is really really basic economics.

If the tax rate is uniform, the overall rate can be kept low, and thus the disincentive to consume any given item is even and minimal.

Again, no, this statement just demonstrates a complete lack of understanding of basic economics on your part. There is no disencentive to consumption associated with income taxes regardless of the rate - you pay the same income tax regardless of how much you consume. A disencentive in economic terms refers to a cost associated with an activity. Income tax does not impose a cost on consumption. Consumption taxes do.

And if the overall income tax rate is uniform and you are raising the consumption tax to replace lost government revenue (all of which would come as a result of tax breaks overwhelmingly given to the wealthy and absolutely ZERO of which would benefit the poor who don`t earn enough to pay such taxes to begin with), all you are doing is shifting the burden of those taxes onto those who can least afford to pay it.

But again, the critical point is that the complete system needs to be looked at. Encouraging more work and investment by lower income tax makes sense, and eliminating welfare for the rich as I have proposed could ensure that government revenues are available to go to the poor to compensate for higher a consumption tax rate (which rich people pay a lot of as they consume more than poor people - like when they buy a house or whatever).

What is the connection though? Ending welfare for the wealthy? To the extent that it exists, fine! But there is absolutely no need to tie that to egregiously regressive tax breaks that almost exclusively benefit the wealthy while at the same time shifting a huge proportion of the burden onto the poor.

The consumption tax is just a necessary evil to gather revenues, and it should not be thought that rich people won't pay a lot of it, because every time they buy a big ticket item like a house, they will.

Of course they will pay in absolute terms, but this would be more than offset by the corresponding decrease in their income taxes, so at the end of the day the policies you are proposing would simply lower overall taxes paid by the wealthy while increasing those paid by the poor. There is nothing even remotely convincing to me, either logically or morally, about this type of argument.

1 ( +1 / -0 )

Please do not reply to other posts sentence by sentence. A general reply will suffice.

0 ( +0 / -0 )

Am I the only one feeling like an idiot or do these people know the secret to profit from digging a whole to cover another ?

0 ( +0 / -0 )

Thon Thaddeo, you are right, I missed the 以上. But the 新築又は取得をした住宅 is the home that has been newly built or acquired, so not necessarily newly-constructed. Though I can see how the govmint and their construction industry bffs would want everyone buying brand-new houses.

I don't think you need to be in the top 5-10% to buy a modest house or nice condominium. You certainly shouldn't need to be; everyone needs a place to live.

Just as no one, especially those on low incomes, should be asked to pay tax on basic essentials like food and health care.

1 ( +2 / -1 )

When takes for gov't reduce, stop rending money to forein gov't such as Iraq and USA. I am sure there are more countries Japan lend $$$$$$$.

1 ( +1 / -0 )

cleo, yes I do have a thing about rich people buying houses and getting tax rebates, while poor people are in need. That's where my priorities are, and I must say I'm surprised that anyone other than the stingy rich would disagree with me. It's no good at all that rich people are getting this special treatment, which life-time low income earners have no hope of ever seeing.

As for second home purchases, I didn't say that the rich get a tax rebate for those - I said that they will pay a lot of consumption tax for those - and why not?

You really need to consider numbers to get things into perspective.

If as a rich person your new home (second one or otherwise) costs 40 million yen, then you would pay 3.2 million yen in consumption tax for that (at the current 8% rate). You will pay in consumption tax on just a house more than the working poor make in a whole year.

If a poor person buys 100 yen worth of bread a week, that's 5,200 yen worth of bread a year. If it becomes 5,310 yen a year due to a 2% increase in consumption tax, s.o. w.h.a.t? People rich enough to buy 40 million yen houses will be paying 800,000 yen extra on just their houses, so the extra burden borne by those in need can easily be compensated for.

People with a total annual income in excess of 30 million yen are not eligible for the housing rebate.

30 million yen in annual income is RICH. A household that makes 10 million yen in Japan is considered to be "upper-middle class", and you've illustrated that people earning 3 times as much are eligible for the special treatment. Such people don't need any tax rebates at the expense of the poor. If you want to talk Mr and Mrs Taro Average, then this tax rebate should be limited to those making up to approximately 5 million yen a year.

Also, as ThonTaddeo noted the abode must be MORE than 50 sq metres to qualify. This is not for modest people living in rabbit hutches by any means.

And there is no "sting" from mortgage repayments in Japan, because as I noted, interest rates are almost zero. (But only people rich enough to be able to afford a house in the first place need apply, low income earners will never get a chance for the rebate since banks will never lend them money - it's not fair at all.)

You are wiser than this - this is at worst the LDP government pandering to the construction industry at the expense of ALL tax payers, and at best just pampering those well-off enough to be able to afford to buy a house in the first place.

rainyday,

You seem to be ignoring my point, and the interests of the poor. I don't care about the taxation system by itself in isolation. Why should I, or anyone? I care about the overall system, which requires money from taxation in order for government to be able to redistribute wealth to the needy, and also everyone is better off if that tax revenue is collected within minimal impact to economic growth so that there is as much wealth as possible to begin with.

If the goal is to increase consumption then reducing the consumption tax rate is clearly the most effective way of doing this.

Yes, but I think the goals are to maximize economic growth and efficiently collect tax revenues for redistribution of wealth to those in need, and for that purpose consumption tax is best, especially in Japan. A poor person with no job has no money to buy anything in the first place, so whether the consumption tax rate is 8% or 10% is irrelevant since in any case the government will be paying for them (if it is doing its job... another debate).

There is no disencentive to consumption associated with income taxes regardless of the rate

Yes, but I was refering to a low, single rate consumption tax and it's impact on consumption, not income tax. Yes, of course even a low simple rate of consumption tax will be a disincentive for consumption, but income tax acts the same with respect to work. In a country saddled with a shrinking working population full of elderly people and lots of tansu yokin, consumption tax is the better devil.

Of course they will pay in absolute terms, but this would be more than offset by the corresponding decrease in their income taxes

No, that depends on the parameters of the adjustments made. Most rich people will buy a house, and under current policies doing that will score them an up to 5 million yen income tax rebate. Low income people on the other hand can not buy a house, so no rebate (fair?). If we get rid of that, and cut income tax rates only slightly, it is certainly possible that the rich come out worse off.

But sure, killing these rich person tax rebates need not be connected with cutting income tax rates, but the point of income tax rates is to boost economic growth (which would have the useful side effect of generating more tax revenues to plug the massive budget gap, but alone won't be enough.)

-1 ( +1 / -2 )

You really need to consider numbers to get things into perspective.

If as a rich person your new home (second one or otherwise) costs 40 million yen, then you would pay 3.2 million yen in consumption tax for that (at the current 8% rate). You will pay in consumption tax on just a house more than the working poor make in a whole year....If a poor person buys 100 yen worth of bread a week, that's 5,200 yen worth of bread a year.

Except for every one rich person, you have 99 poor and average people. Who cares how much the rich spend on houses or consumption tax or whatever. They can afford it. If they can't afford it, they can downgrade a bit and still be doing just fine. On the other hand, when a family is just scraping by, an increase in consumption tax can tip them from just managing into poverty; saying you'll then give them a hand-out financed by a rich man's purchase of a second house is literally adding insult to injury.

-1 ( +2 / -3 )

this just passes the buck on to the wards. Japan doesn't have a tax problem, it has a wages problem. Ironically if Japanese were not on the verge of karoshi everyday and paid properly (more), there would be more tax received.

-1 ( +0 / -1 )

When comments are conversations, we have to read repetitious arguments So, I just skip to read. Space is limited. Many of us are not interested in reading private conversation.

-4 ( +0 / -4 )

Abe's advisers to propose income tax cuts

I smell a call to election coming.

0 ( +0 / -0 )

Cleo, Any tax system changes are always going to affect some people at the margins, but politicians need to make decisions in the benefit of the whole. Slash the welfare for the rich, gather tax revenues efficiently, and help the poor with the extra. It's the moral way to go.

Sf2k, the wages problem stems from a weakness in demand for labour, which can be addressed by improving the regulatory system and making the tax system work to incentivize income and investment. Plus new business. Japan needs more dynamism in order to see wage growth.

-2 ( +0 / -2 )

Any tax system changes are always going to affect some people at the margins

Fine. Then arrange the changes to affect the people at the weaker margin in a good way, not by tipping more into poverty then turning them into charity cases.

Slash the welfare for the rich

Yes

gather tax revenues efficiently

Fair is more important than efficient - and in the end, more efficient, too.

and help the poor with the extra.

How about don't tip more people into poverty in the first place.

It's the moral way to go.

It's the lazy way to go. And immoral.

0 ( +1 / -1 )

You seem to be ignoring my point, and the interests of the poor. I don't care about the taxation system by itself in isolation. Why should I, or anyone? I care about the overall system, which requires money from taxation in order for government to be able to redistribute wealth to the needy, and also everyone is better off if that tax revenue is collected within minimal impact to economic growth so that there is as much wealth as possible to begin with.

In deference to the request of the moderator I`ll just write a final general comment rather than a point by point response.

Im not ignoring your point, Im just focusing on the tax aspect because that is what I find most objectionable about what you are arguing in favor of (you may take my lack of comment on other stuff you mention as tacit agreement on those points, or at the very least a lack of a strong objection). This article is specifically about tax though, so its not really very convincing to just respond to clearly stated grounds for disagreeing with you on tax policies with vaguely worded references to "the overall system", etc.

If I gather correctly, your argument is that a flat income tax should be implemented, with a raise in the consumption tax to offset losses in government revenue, and the closure of various subsidies/loopholes in the system which benefit the well-off. As I outlined above this would constitute a massive shifting of the tax burden from the wealthy to the poor, even with those closed loopholes taken into account. You seem to justify this with the argument that your proposed tax system will spur economic growth, which will benefit those poor, thus offsetting any disadvantage they experience under the new tax system. This is the usual flat tax proponent argument at least.

The only countries in the world which have implemented such schemes are former Soviet/Eastern block republics, which seem to have had mixed results. There doesn't seem to be any actual empirical evidence that adopting these tax systems boosted economic growth (or employment, hours worked, wages, etc) in any of those countries, though most at the least avoided crashes in government revenue by setting the rate high enough. The main benefit in those countries seems to have simply been increasing compliance with tax law (with positive effects on government revenue as a result). The main argument in favor of a connection between economic growth and flat tax rates is that under a progressive tax regime there are people deliberately not working to their full potential owing to concern that once the pass certain thresholds an increasing portion of their income will go to the government and that eliminating this disincentive towards extra work will unlock this frustrated growth potential. There doesn't seem to be much evidence of this at work in countries where this has happened though.

Admittedly it is hard to draw conclusions from those experiences for a country like Japan (or any other developed Western country) owing to the extremely different institutional circumstances that exist. Oligarchical economies work in different ways from more market-oriented economies.

What we do know however is that gradual reductions in upper income tax rates over the past thirty years in Western countries (which represents a form of movement towards a flat tax rate) has been directly associated with spiraling levels of income inequality. Economists like Thomas Piketty attribute this to the fact that corporate executives in the West have a free hand to establish their own levels of compensation and that, with the drastic lowering of the upper tax rates, they have had massively increased incentives to abuse their position and extract as much from the corporations (which are the organizational form that governs most economic activity in the West) as possible. None of this has been associated with them working harder or smarter, its just plain old opportunism that actually damages the real economy rather than promoting growth . Creating an even more regressive tax system as you are proposing would just exacerbate these already existing trends.

0 ( +0 / -0 )

Then arrange the changes to affect the people at the weaker margin in a good way

If as a result the people at that weaker margin (and those below it) are worse off overall, as well as everyone else, that's cutting off the nose to spite the face. Totally and utterly immoral, all in the name of a mistaken concept of what the tax system is for.

The tax system alone in isolation can not produce "fair" outcomes. The tax system is only about how much is taken away from different people and entities, not to try to be "fair", but in order for the government to be able to redistribute that wealth to where its priorities are (or should be). It is the redistribution that leads to fairness and guarantees people's well being, not how little is taken away from people who earn close to nothing in the first instance.

Good policies will lead to higher economic growth, better jobs, and more people moving upwards past those margins. That is what every moral person should aspire to for their country, rather than thinking crappy policies are "fair" when they make things worse for everyone.

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If as a result the people at that weaker margin (and those below it) are worse off overall, as well as everyone else, that's cutting off the nose to spite the face. Totally and utterly immoral, all in the name of a mistaken concept of what the tax system is for.

I couldn't agree with you more. But I think you and I have different ideas of 'what the tax system is for'.

The point of the tax system is not to produce 'fair' outcomes, or to redistribute wealth. The point of the tax system is to give the government enough money to keep the country running smoothly - paying to upkeep roads so that we can all get about, build and upkeep schools so that the next generation will be well educated, collect and process our waste so that we're not living in a stinking cesspit, build and operate hospitals so that when we get ill we can get the treatment we need, maintain a welfare service so that those who fall on hard times can have a soft landing and a timely hand back up onto the ladder. Even paying our politicians to oversee everything and maintain friendly relations with our neighbours and indeed the world. This benefits everyone equally, and as such everyone should by rights contribute equally. That does not mean everyone should contribute the same amount of money, or even the same percentage of their assets, as everyone else. As the saying goes, from each according to his means, to each according to his needs.

As the system is at present, the lower a person's income, the greater the proportion of his income is taken from him in the form of consumption tax. For a person living and-to-mouth, it is a tax on 100% of his income. For someone at the opposite end of the scale, 8%, 10%, 20% even, isn't even noticeable. It cannot be right for people with fewer assets to shoulder a greater proportion of the tax bill than the affluent. The difference has to come from income tax; those with little income pay less, those with higher incomes pay proportionally more. As the Japanese tax system is arranged at the moment, a person with a taxable income of less than ¥1,950,000 pays a flat tax rate of 5%, not deductible, leaving him with ¥1,852,500 (¥154,375 a month) to live on. Someone with a roughly average taxable income of ¥3,500,000 pays 20% tax with a deductible of ¥427,500, (a 'real' tax rate of around 7.8%) leaving him with ¥3,227,500 (¥268,958 a month). Someone lucky enough to have a taxable income of 4 times that, ¥14,000,000, pays 33% with a ¥1,536,000 deductible, leaving him with ¥10,916,000 (¥909,667 a month) to struggle by on, a real tax rate of around 22%. It's a sliding scale: some might argue that it could be stiffer, or less stiff, but the basic premise, that the more you have the more you pay, is sound.

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rainyday,

No where was I arguing for a flat income tax specifically, only that income tax (however many brackets you opt to have) in general is inferior to consumption tax for the purpose of efficiently collecting tax revenues.

But I do believe a single consumption tax rate at a low level is better than multiple consumption tax rates at varying levels - again from an efficiency perspective. New Zealand has their rate at 15% now and they reduced income tax rates last time they bumped it up. The government didn't get kicked out of office, which says it all.

Income tax revenue is also correlated with economic performance. So in an economic recession when people need more help than usual the government has less money to spend. Consumption tax revenues are comparitively stable through economic cycles.

The inequality issue, I think, is a topical issue these days because western governments have failed in recent years to enact policies that make for economic growth that is good enough to boost activity and create the types of jobs that will allow people to live better lives. In rich developed nations, even those at the bottom end of the scale are better off than they would be being relatively wealthy in a poor country.

cleo,

All government spending is redistribution of tax revenues, I don't think there is a real difference there.

For a person living and-to-mouth, it is a tax on 100% of his income.

I think what you mean is someone who spends all their money has no money to save, but they do choose what it is that they consume (and with a single rate of consumption tax, the choice is entirely theirs).

It cannot be right for people with fewer assets to shoulder a greater proportion of the tax bill than the affluent.

It's impossible to make the proportions equal though. A person who saves nothing by definition will always spend 100% of their earnings. A richer person will typically always have something left over, and thus spend a lower proportion of their income.

Unless you go full-soviet republic you can't make those proportions equal, and going full-soviet republic leads to economic ruin.

And frankly, I have fewer assets than rich people, and I don't care. If someone has more than me, good for them!! I am doing fine. I don't need assistance. The more rich people, the better. It's the people less fortunate than me and the rich who need the help, not me and the rich. Mark Zuckerburg being rich has not made me poor.

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The inequality issue, I think, is a topical issue these days because western governments have failed in recent years to enact policies that make for economic growth that is good enough to boost activity and create the types of jobs that will allow people to live better lives.

Its a topical issue because its an actual thing that is happening. And, for reasons that I mention above, there is a pretty close connection between that and changes in the tax system.

About economic growth, the problem for western countries is that by definition it can only occur through two channels: 1) population growth (more consumers, workers), or 2) increased productivity. All developed countries face the same problems with each. They all have below replacement level birthrates so their populations are either shrinking like Japan, stagnating like parts of Western Europe, or growing at a slow rate only thanks to immigration. So growing the economies through growing their consumer/worker base isn't happening like it did in the post war years. The problem with regard to productivity is that their industries are all already at or near the cutting edge of technology and management expertise, so increases in productivity tend to be small and incremental (as opposed to what happens in a country like India where there are huge rooms for increases by simply adopting technologies/ practices already developed elsewhere).

You seem to be operating under the assumption that jiggling with tax or other policy levers is the key to unlocking economic growth and creating great jobs in the developed world, but the reality is that there are no options on the table that will address these two fundamental issues.

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That is indeed my assumption, and I disagree 100% with your final paragraph.

Japan's environment especially is ripe with useless, detrimental systems, rules and regulations that could be overhauled and result in productivity increases. This is exactly what the Abenomics 3rd arrow was supposed to be, but Abe has not had the political guts to implement it all despite high talk in the early days that created a sense of optimism.

Structural reforms can and do produce results, but it is usually only after things get really bad that politicians find the courage to act.

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Yeah, I agree there are improvements that can be made to increase productivity through structural reform, my point is that such improvements will not be enough to create the massive transformation of the economy that you seem to be implying. The low hanging fruit has already been picked, reforms can make improvements on the margins but at this point even if the most ambitious ones are successfully carried out they won't alter the fundamental problems I addressed earlier.

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I see. I am far more optimistic about the possibilities, although pessimistic that it will see the light of day before things get worse.

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Cut the the income tax (proportional) and raise the consumption tax, the key here is to reduce the income tax proportionally so the rich will get a bigger tax cut while raising the most unfair consumption tax which does apply at the same rate to everybody regardless of your level of income, this is the policy for wider disparities among people. I am not sure who are those advisers and who the govt want to fool but the only goal here is not to spur the consumption, it is to pressurized the slaves even more while giving more benefit to the masters.

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