Tag Archives: Tax Hike

Japan Boosts Sales Tax, May Test Abe’s Policies

Japanese citizens across the country have been rushing to the malls and supermarkets ahead of the sales tax increase this Tuesday. According to George Nishiyama of the Wall Street Journal, Japan plans to implement a sales tax increase from 5% to 8%, which was designed to help pay for the nation’s exploding social welfare costs and public debt. It is expected that citizens will begin to rein in their spending habits after the tax increase, which appears to contradict Prime Minister Abe’s plan to stimulate the economy. As Nishiyama points out, in 1997, the last time Japan initiated a sales tax increase from 3% to 5%, Japan ended up plunging into a recession lasting 18 months. He also points to a poll by the Kyodo new agency that suggests that

“66% of respondents plan to cut spending, while 33% said they don’t plan any changes. Nearly 80% expressed worry about the economic outlook.”

Overall, Nishiyama seems to suggest that the sales tax rise may be dangerous, in that it could contribute to factors leading to a failure by Abenomics to lift the economy, which in his words “has already faced criticism that it is a policy of exiting deflation by creating a bubble through easy money at the expense of ordinary Japanese.”

Whether this was a causal relationship is yet to be seen, but in any case it seems as though there may be unforeseen consequences of issuing sales tax increase is arriving at the wrong time, and, on one hand, that it has the potential to weaken Abe’s efforts to boost the Japanese economy.

On the other hand, the Economist appears more impartial than the Wall Street Journal to the idea of the sales tax increase, considering fiscal consolidation over the longer term a “fourth dart in the quiver” against Japan’s anticipated financial woes. According to the Economist, Japan’s national public debt issue is one of them most pressing problems in the Japanese economy, as the national debt is anticipated to exceed 240% of national GDP later this year. The Liberal Democratic Party of Japan (LDP) last year cooperated with the Democratic Party of Japan (DPJ) to pass the sales-tax bill. This will reportedly increase the sales tax from 5% to 8% this April, and to 10% in October of this year. Prior to Prime Minister Abe’s inauguration, this policy initially looked like it would help get the country on track; it would reportedly cut the Japanese budget deficit to around 3.2% of GDP. This was, of course, before Prime Minister Abe’s stimulus package that would make hitting the 3.2% of GDP target improbable.

The authors don’t appear very worried about the potential negative effects of Abenomics on the  Japanese debt market. They mention that yields on Japanese government bonds (JGBs) are currently historically low, and that the market for the bonds is dominated by Japanese savers and institutions, which are more loyal and less “flighty” than foreigners who would demand high yields. This would make it less likely that there would be a rapid escape from Japanese bonds over worries that the nation could not pay its debts, and therefore may make the market more stable. Furthermore, the Bank of Japan is currently purchasing 70% of new JGBs issued annually. Essentially, much of Japan’s debt is being paid for with money that the Bank of Japan prints, that the rest is mostly in the hands of Japanese citizens, and that this is not an immediate problem. The economist also points out that while Abe’s policies may hurt Japan in the near-term, that it should boost economic activity, both raising tax revenues and making it easier for the government to raise the consumption tax.

If I were forced to pick a side, I’d stick with the Economist on this issue. First, like in many situations in Economics, it’s difficult to discern causality between events, especially one time events. This throws a bit of doubt into whether the tax increase would inevitably lead to further financial problems for the Japanese economy. The tax increase would mean that Japanese citizens would have less disposable income to spend on consumption, but Abe’s current stimulus policy may be large enough to take the edge off and could make it less likely that a subsequent recession will occur. Furthermore, it may be advantageous use the increased tax revenues to wind down the Japanese debt problem now rather than later. As another Economist article points out, the Japanese also face an aging population that in the near future will begin to withdraw money from their retirement plans. This will mean that the national savings rate could decrease in the near future and make it difficult for the Japanese government to find able citizens to buy up its debt. A tax increase now may be a proactive way to reduce this burden before things get bad. Of course, this is a contentious issue in Japanese politics, and the effects of Japan’s current policies are uncertain, so in the end it will be important for both sides to proceed cautiously.

 

Is Unhealthy Eating our Choice?

As obesity and diabetes continue to become a bigger and bigger part of American society, policymakers are attempting to limit access to unhealthy foods in attempt to curb these trends. As economic principles would suggest, sugary and fatty foods’ direct correlation to diabetes and obesity poses a negative externality on the health of our society. Normally, negative externalities pose an additional tax meant to offset their societal consequences. In the case of food, however, many argue that it is their right to buy a 64 ounce “Big Gulp” or stock up on salty snacks and are willing to fight to keep those options available.

The most famous instance of these policies coming to life was the quota on soda drinks in New York City that was to go into effect last March. The city’s Board of Health determined that large containers of soda were a leading cause to the diabetes problem in America and planned a ban for the sale of non-diet drinks larger than sixteen ounces. Immediately, citizens furiously challenged the law claiming it directly violated their right to choose. Last summer, an appeals court overturned the policy and ended this would-be ban on large drink sizes.

This weekend, the Native American Navajo tribe voted to impose higher taxes on junk foods while creating tax breaks for healthier choices such as fruits, vegetables and nuts. Under the plan, taxes on soda and unhealthy snack foods would increase to 7% while the aforementioned health foods would not be taxed at all. The objective of these rulings is to modify opportunity costs of these foods so consumers choose the healthier option simply by their preferences. If the prices are adjusted enough, the lawmakers hope that fruits and veggies will give as much of a benefit in terms of taste per dollar as the sugary options. They certainly already are providing a much better nutritional value per dollar, but that hasn’t seemed to influence U.S. consumers’ purchasing behavior in the past as much as taste.

Of these two scenarios (imposing tax hikes or quotas), the tax increase scenario seems much more reasonable. There is something scary about a full ban on a product, even if it remains available in smaller sizes. Fundamentally, the reason consumers often choose to purchase large sizes in the first place is the economies of scale: a thought process that says “what’s 25 more cents when I’m already paying $1.50?” By taxing larger sizes at a value that makes a significant price increase (let’s say an additional $1, or 40%), I believe a significant number of consumers would stick to buying the small size. In addition, eliminating free refills could be an option that does not restrict choices but makes larger quantities more costly. Going forward, using externalities to levy taxes on junk-foods may be the only option we have to solve the obesity problem in America.

The many campaigns over the years encouraging healthy eating in the U.S. simply haven’t worked, and much of the problem is that eating healthy costs more. Sure, places such as McDonald’s have added options such as apple slices to their menu, but when customers have the option to choose a McDouble (390 calories) or apple slices (15 calories) for the same price, they seem to always purchase the one that fills them up. An attempt to eliminate the junk-food options completely would violate our rights and really isn’t necessary for a large part of the population, who can effectively maintain a healthy diet and only are treating themselves to junk-food on occasion. A tax of sorts on soda and sugary/salty snacks, especially in excessive sizes, may be what America needs to control its diet and avoid serious health concerns in the foreseeable future.

Featured Articles:

Campoy, Ana, “Navajos vote to try junk-food tax in fight against obesity”, The Wall Street Journal. January 31, 2014.

Associated Press, “Appeals court rules against NYC soda ban,” July 30, 2013.

For more McDonald’s Nutrition Facts information, see this link.

Abenomics in 2014

After Shinzo Abe took office as the Prime Minister of Japan in December 26, 2012, there has been much excitement over what is called the Abenomics. To end Japan’s long lasting deflation and sluggish, if not negative, growth over the past 15 years or so, Abe took radical measures to revive the economy. These include quantitative easing, devaluations of yen and large investments in public infrastructure programs. Abe’s effort received highlight around the world as it showed impressive results thus far.

Japan’s concern for their economy started in 1989 when the real estate bubble bursted. Following the 1970’s economic boom in Japan, Japanese seized the opportunity of low interest rate with high liquidity in the market to invest heavily in real estate as well as stocks in both domestic and foreign investments. However, when the Bank of Japan realized that the hype over this excessive investment was not sustainable, it raised the interest rate sharply, bursting the bubble. Unpayable debt accumulated and stock market plummeted along with asset prices in real estate. In order to stabilize the economy, the central bank made big volumes of loans, government injected extra money into the economy and a large restructuring of debt took place. Many banks could not get extra loan even with very low (or lower bound zero) interest rate due to bad credit. Stagnation took place and this was the start of what is called the lost decade.

Howe did Abe fix this problem? As mentioned above, large government spending, deliberate depreciation of yen and aggressive quantitative easing. The depreciation of yen especially played a major role as it lead to a large export boom. The Nikkei, while still under 58% of 1989 level, gained 57% in 2013 (http://articles.economictimes.indiatimes.com/2014-01-12/news/46113491_1_core-consumer-price-index-nikkei-abenomics).

The problem is then, how is Japan going to pay for all these? According to January 13, 2013 news, Japan hit a record current-account deficit as imports climbed back up. The article says, “Weakness in the yen and extra demand for energy because of nuclear-plant shutdowns are driving up Japan’s import bill, highlighting drags on the recovery that will also include a sales-tax increase in April. A longer-term risk for the nation is any shift to a sustained deficit that would undermine investor confidence in Japanese government debt” However, the consensus among Japanese economist is that the “the deficit should start to gradually shrink on the back of a global recovery” (http://www.bloomberg.com/news/2014-01-14/japan-posts-record-current-account-deficit-as-import-costs-swell.html).

In addition, economists like Paul Krugman fears that the scheduled rise in consumption tax from 8% to 10% in 2014 will discourage spending, hurting efforts to climb out of deflation. With deflation effect still in place, this increase of 2% will hurt more in real terms (http://krugman.blogs.nytimes.com/2013/06/10/abenomics-and-interest-rates-a-finger-exercise-wonkish/?_r=0). With long history of deflation in the past two decades with very sluggish growth, this rise in tax could act as a sharp break on the upward trend.

The tradeoff between deficit growth and economic expansion must be carefully reviewed. And only time will tell how Japan will react to the new roller-coaster ride the Japanese economy has gone through in the past year.