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Fiscal Policy

Fiscal Policy

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Fiscal Policy

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  1. Fiscal Policy Miscellaneous Notes Fall 2000 Economics 285

  2. Main Tax Issues • Japan is not a “republic” so the national budget is key. • In contrast, any analysis of the US must focus on state and local government • You need to examine: • The main budget • Supplemental budgets • FILP (Fiscal Investment & Loan Program)

  3. Why does it matter? • Taxes distort decisions • Inefficient taxes can be costly! • Ex: a 100% tax generates no revenue but stifles activity! • Taxes can change income distribution • Shouldn’t the rich pay proportionately more? • Taxes can be unfair if random in impact • Shouldn’t people with identical incomes pay identical taxes?

  4. Why does it matter (II) • Aggregate levels are part of fiscal policy • Taxes have “feedback” (multiplier) aspects • Deficits (surpluses) affect interest rates • Are current policies sustainable? • Used well? • What are they spent on? • Have they “worked” as fiscal policy? • Is more decentralization desirable? • Local government ability to set priorities

  5. Expenditures • How does the Japanese government view its role in society? • The structure of expenditures is one measure of how the government views its role • Need to disentangle “rational” policy from the purely political • Examples • National health care • Construction

  6. Are Japanese Taxes High?

  7. Comparative Structure

  8. Composition of Taxes in Japan Composition

  9. Overview of Public Finances

  10. Entitlements in Japan

  11. Japan’s Old Age Boom: Ratio of Elderly to Population

  12. Trend of the Number of Births and the Total Fertility Rate

  13. Toward the Future • Japan will have a high “dependency ratio” • Dfn: ratio of working to population • Will approach 1:2 • To maintain current consumption levels for the elderly will entail huge transfers • Will the tax rates needed to do that be politically feasible? • Some projections call for a 25% consumption tax!

  14. FILP Fiscal Investment and Loan Program

  15. Local Government Income & Expenditures

  16. F I L P

  17. Some FILP Details

  18. Example of FILP in Action: Road Construction

  19. Issues • Is fiscal policy effective? • Is public investment useful? • Are taxes equitable? • Do taxes impose small distortions or large one? (“excess burden” is the jargon)

  20. Crayon • Small business & farm taxation • Claim: tax evasion is widespread • Wage earners pay 90% (ku) • Payroll deductions make it hard to evade taxes • Farmers pay no taxes (rei) • Allowed to operate on a cash basis • Never audited • Small business pays 40% (yon) • No requirement to keep books for very small firms • Very, very low audit rates • Published handbooks to audit triggers • Early retirment by tax auditors, to set up tax offices

  21. Real Estate Taxes • Huge increase in postwar land prices • But only modest capital gains exemption • No deduction if use proceeds to buy new home • Impact • Represses transactions - compared to the US, few sales • Makes it hard to move with job rotations • Many Japanese live apart from their familiestanshin funin • But education, other factors add to reluctance to move

  22. Effectiveness • On-again, off-again policies • Expectations matter! • Examples • Consumption vouchers • Temporary tax cuts: April 1997 • Date of future tax increase well publicized! • Coincided with a scheduled increase in the consumption tax (national sales tax) • Deep recession followed

  23. Multiplier Analysis

  24. More multiplier dataOctober 1998 EPA Domestic Model

  25. Usefulness of Investment • Niigata highways • National Road 17-go parallels Kanetsu Highway • 17-go is bumper-to-bumper traffic on 2 lanes • Kanetsu Highway is empty • Tolls unreasonable under FILP “self-finance” concept, rendering roads useless • Regional airports • No useage, might never be even without steep landing fees. Pure pork barrel / poor planning.

  26. Not all bad • Carl Shoup instituted tax reform under the Occupation. While partial, historically Japan had: • No double taxation of dividends • No capital gains taxes on securities • Simple structure to income taxes that lessened the resources devoted to tax dodges • Large basic exemptions that limited the regressiveness of taxes

  27. Sustainability • Current deficit levels are not sustainable • 140% of GDP gross government debt (central & local) • Government is vulnerable to higher interest rates • Demographic transition implies huge future obligations • Just-published (Oct 12?, 2000) national balance sheet shows up to ¥700 trillion (US$7 trillion) in excess liabilities [with no correction for dubious assets] • That’s more than 100% of GDP…not an amount that can be borrowed

  28. The End • Resources: • Government web sites in English provide an overview of the budget and FILP • Hiromitsu Ishi, The Japanese Tax System. 2nd edition, Clarendon Press (Oxford), 1993. • Various JEI reports - see their web site and (partial) search capabilities, plus the printed indexes for older years in Leyburn.