Japan government uses tax cuts to benefit favored industries

There’s a lot of talk in Tokyo about how to tax the population to pay for the reconstruction of Tohoku, fix the social security system, and generally raise the cost of energy and everything else Japanese families need.  Of course, the reason for all of this is that the government has been on a two-decade spending binge, most of which was wasted bailing out Japan’s over-leveraged zombie banks and favored industries.

Lost in the debate about raising taxes is another proposal by the fine folks at METI to actually reduce taxes … but only for certain purchases.  It should come to no surprise that the businesses who will benefit from this are the same ones that always benefit from government bailouts, the auto industry and the banks.

Government ministries and agencies are asking for 910 billion yen in tax reductions under fiscal 2012 tax code revisions, according to Ministry of Finance data released Wednesday, lower than the 1.56 trillion yen in cuts they sought in fiscal 2011.

The 204 requests submitted, including overlapping areas, focused on changes designed to kick-start domestic investment and consumption — areas that have slumped as the nation copes with the aftermath of the March 11 disaster and a strong yen. Proposed tax increases totaled just 5.5 billion yen. – Nikkei

Right.  Actually, they are focused on struggling businesses, the tax merely another form of such programs as “eco-points” where taxpayer money is used to encourage consumption without affecting the corporations profits.

The Ministry of Economy, Trade and Industry’s proposal to simplify motor-vehicle-related taxes is the largest request. It seeks to abolish the national motor vehicle tonnage tax and the prefectural automobile acquisition tax, a move that would result in cuts totaling around 700 billion yen and roughly 200 billion yen, respectively.

The hefty tax burden is seen as contributing to lackluster auto sales in Japan. This and a strong yen have fueled concerns that automakers and others may increasingly shift operations overseas, resulting in a hollowing out of the domestic industry.

This is the only tax cut worth talking about as it comprises 99% of the total cuts.  Of course, the banks (which provide the financing) and the auto industry loves this plan.  It will effectively lower the cost of owning a vehicle while allowing the manufacturers to maintain profit margins.  Left to their own, it is likely that the manufacturers would figure out another way to sell their vehicles.  But, since the government is always ready to bail out those industries, a few phone calls for help is about the extent of the automakers efforts.

That aside, the most important admission by the government – and we don’t understand how the Japanese public continues to allow this scam – is when the government taxes something, it gets less of it.  Higher taxes on autos means fewer auto sales following the principle of causation.  In fact, the government is utilizing this very principle in requesting these tax cuts.  One wonders, then, if they study the like effects of other taxes?

  • Raise consumption taxes and one gets less consumption.
  • Raise tobacco taxes, one gets fewer tobacco-related sales (including a whole host of accessories sales)
  • Raise inheritance taxes …. well, one hardly gets fewer deaths.  However, one does get more people figuring out ways to avoid paying those taxes, especially for very wealthy people.  It is doubtful, for instance, the Yukio Hatoyama will have to pay the same inheritance tax rate when his mother dies (we are not advocating that occurrence) as would the children of a shop owner or farmer with far less to pass on and fewer resources available to help avoid the tax.
  • Raise capital gains taxes and one will gets less investment activity.  This is a particular problem for the government which constantly whines about the lack of retail (individual) investments.  The same can be said for taxes on interest earned and dividends.

As much as we like the idea of cutting taxes, this focused tax cut scheme is simply another government program to control the economy.  The overall economy would benefit far more if this same amount of tax was cut from the consumption tax of the income tax, allowing people to choose for themselves where to spend their money.  But, then, the government would lose some control over where, within the economy, money is directed.  And that just won’t do in Japan.

Oh, and … how’s that controlled economy working out in Japan these days?

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