Download Fiscal Policy

Fiscal Policy
Miscellaneous Notes
Fall 2000
Economics 285
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)
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?
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
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
Are Japanese Taxes High?
Comparative Structure
Composition
of
Taxes in
Japan
Composition
Overview of Public Finances
Entitlements in Japan
Japan’s Old Age Boom:
Ratio of Elderly to Population
Trend of the Number of Births and the Total Fertility Rate
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!
FILP
Fiscal Investment and Loan Program
Local Government Income & Expenditures
F
I
L
P
Some FILP Details
Example of FILP in Action: Road Construction
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)
Crayon
• Small business & farm taxation
• Claim: tax evasion is widespread
九・零・四
– 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 （税理士）
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 families
tanshin funin 単身赴任
• But education, other factors add to reluctance to move
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
Multiplier Analysis
Response to a Permanent Increase of Government Investment by 1% of GDP (real variables)
1s t year
2n d year
3rd year
Real GDP
1.21
1.31
1.24
Growth Ra te
Real GDP
1.21
0.10
-0.08
Cons umption
0.26
0.47
0.66
Private Fi xe d
In ve stme nt
0.39
0.97
0.81
Resi dential
Cons truction
1.30
0.62
0.45
1s t year
2n d year
3rd year
Private GDP
Defl ator
0.04
0.19
0.52
Hourl y Wage s
0.22
0.70
1.07
Unem ployme nt
-0.07
-0.13
-0.12
Capa city
Util izatio n
2.59
2.81
2.70
Fi sca l Defi cit
(% of GDP)
-0.60
-0.33
-0.31
Exports
-0.02
-0.20
-0.63
Im ports
1.66
2.42
3.04
Nomi nal GDP
1.29
1.67
2.04
Lo ng-te rm
Curren t Acco unt
In teres t rates
(% of GDP)
0.08
-0.16
0.24
-0.25
0.35
-0.41
Yen - Do llar
Rate
-0.06
-0.55
-0.65
Response to a Permanent Personal Income Tax Reduction of 1% of nominal GDP
1s t year
2n d year
3rd year
Real GDP
0.41
0.57
0.22
Growth Ra te
Real GDP
0.41
0.16
-0.37
Cons umption
0.53
0.57
0.37
Private Fi xe d
In ve stme nt
0.81
1.77
0.65
Resi dential
Cons truction
0.10
0.34
0.24
1s t year
2n d year
3rd year
Private GDP
Defl ator
0.01
0.09
0.21
Hourl y Wage s
0.05
0.28
0.37
Unem ployme nt
-0.02
-0.06
-0.03
Capa city
Util izatio n
0.88
1.15
0.36
Fi sca l Defi cit
(% of GDP)
-0.89
-0.78
-0.88
Exports
0.56
1.11
0.96
Nomi nal GDP
0.43
0.69
0.49
Lo ng-te rm
Curren t Acco unt
In teres t rates
(% of GDP)
0.03
-0.05
0.11
-0.11
0.14
-0.13
Yen - Do llar
Rate
-0.02
-0.26
-0.38
0.00
-0.07
-0.23
Im ports
More multiplier data
October 1998 EPA Domestic Model
Response to an Increase in Short-term Interest Rates by 1 percentage point
1s t year
2n d year
3rd year
Real GDP
-0.09
-0.37
-0.63
Growth Ra te
Real GDP
-0.09
-0.28
-0.27
Cons umption
-0.03
-0.10
-0.14
Private Fi xe d
In ve stme nt
-0.28
-1.33
-2.28
Resi dential
Cons truction
-0.25
-0.69
-0.62
1s t year
2n d year
3rd year
Private GDP
Defl ator
-0.02
-0.09
-0.27
Hourl y Wage s
-0.01
-0.10
-0.27
Unem ployme nt
0.00
0.02
0.05
Capa city
Util izatio n
-0.20
-0.77
-1.27
Fi sca l Defi cit
(% of GDP)
-0.03
-0.16
-0.33
Exports
-0.10
-0.50
-0.82
Im ports
-0.12
-0.38
-0.28
Nomi nal GDP
-0.10
-0.41
-0.77
Lo ng-te rm
Curren t Acco unt
In teres t rates
(% of GDP)
0.27
-0.01
0.40
0.00
0.37
0.03
Yen - Do llar
Rate
-0.74
-2.19
-2.37
Response to 10% Devaluation of the Yen against the US Dollar
1s t year
2n d year
3rd year
Real GDP
0.40
1.06
1.88
Growth Ra te
Real GDP
0.40
0.67
0.84
1s t year
2n d year
3rd year
Private GDP
Defl ator
0.18
0.60
1.08
Hourl y Wage s
0.05
0.33
0.86
Cons umption
0.01
0.10
0.37
Private Fi xe d
In ve stme nt
0.77
2.56
4.48
Resi dential
Cons truction
0.86
0.18
0.35
Unem ployme nt
-0.02
-0.08
-0.15
Capa city
Util izatio n
0.88
2.27
3.96
Fi sca l Defi cit
(% of GDP)
0.09
0.32
0.67
Exports
Im ports
0.15
-0.89
-2.17
Nomi nal GDP
0.41
1.21
2.37
Lo ng-te rm
Curren t Acco unt
In teres t rates
(% of GDP)
0.09
-0.04
0.29
-0.01
0.44
-0.02
Yen - Do llar
Rate
10 .00
10 .00
10 .00
1.63
3.19
3.87
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.
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
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
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.