Tuesday, May 22, 2012

Are Tax Increases Just A Diversion?

So Fitch has downgraded Japan's debt. Japan, you may be surprised to learn, is the most indebted country in the world, owing something like 200% of their GDP.
TOKYO—Fitch Ratings downgraded Japan's sovereign rating to A-plus and said it was maintaining a negative outlook due to the "leisurely" pace of the county's efforts to remedy its dire fiscal situation. The firm's long-term foreign-currency rating had been AA and its local currency issuer default rating had been AA-minus.
That's interesting, but it wasn't what jumped out at me. Here's the kicker.
The government of Prime Minister Yoshihiko Noda has been trying to push through a bill doubling the national sales tax, but its prospects are highly uncertain given the deeply divided parliament. Even if it does pass, raising the rate to 10% in two stages by 2015 is considered insufficient to restore the country's fiscal balance.
Whether or not the sales tax hike closes the gap sufficiently is temporarily irrelevant. What's the long term plan here? If the current level of government spending was going to lead to prosperity, then where is the prosperity? They've been doing it for decades and haven't been able to "grow their way out of debt" to borrow the tired phrase of the statists.

And therein lies the rub for all tax hikes. The deficit-reducing salve of a tax increase is a future good while the spending of government money is a current good. Forget the debt, where's the reward for the government spending?
This has nothing to do with anything, but I couldn't think of an interesting image and I didn't want to leave the post as text only.

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