Motohiro Sato Hitotsubashi University

Transcription

1 Motohiro Sato Hitotsubashi University 1

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3 Macro Demand (AE) A Japanese government has addressed lack of macro demand as the source of long lasting deflation Economy has run into deflation spiral G C D Multiplie r effect AE C Deflation Spiral B GDP gap I G ( X M) Fiscal policy has served to boost the demand so as to fill GDP gap Output 3

4 Composition of G has changed but its purpose ultimately remains the same, i,e. to raise the macro demand 90s ~ 2009 (except Koizumi administration) Democrat party government Abenomics G=Government expenditure Public investment Social expenditure Child benefit health and long term care Disaster prevention National resilience project G has been supplemented with (i) tax cut that expectedly work to raise C as well as (ii) quantity easing monetary policy that in turn weakens yen thus promoting E 4

5 In fiscal policy, (a sort of) Keynesian perspective has been dominant whereas debate over quantity easing monetary policy is (more or less) based on classical monetarist view, i.e., defilation is monetary phenomenon. Keynesian Fiscal policy Y C I G ( X M) Monetary policy MV PY Neo classical 5

6 Abenomics has been hybrid of 1 (old fashioned) Keynesian in short run and 2neo classical or supply side economics in long run. Short run Long run Y Optimistic expectation C I Growth enhancing reform Weak yen G ( X M) But surely Abenomics is not pro fiscal and does not address fiscal consolidation as policy priority High prospect that 1reflation and 2growth can solve the problem. 6

7 Reflationist Structural reformists Progrowth Policy priority Fiscal deficit Position To remove deflation pressure by quantitative easing and aggressive fiscal policy To enhance growth through deregulation and tax cut Is consequence of low macroeconomic performance Fiscal Keynesian? Supply side economists? Pro fiscal consoli dation To reduce fiscal deficit by cutting expenditure and raising tax May cause macro economy turmoil Patronized by MOF?or truly economists? Abenomics? 7

8 For fiscal sustainability, public bond stock should not grow higher than GDP so that B/Y does not diverge. Abenomics aims to achieve the sustainability by raising interest growth gap s=primary Surplus g Y Y B B rb ( t B g) r Y B s Y Pro fiscal consolidation s Y B Y Monetary Policy? Interest - Growth ( r g) Growth promoting Abenomics 8

9 No matter what theory tells us, interest rate remains low as public debt ratio to GDP being increased. % General government net financial liabilities (percent of GDP) Long-term interest rate Year 9

10 Japan public finance may have remained sustainable due to (i) future pessimism and (ii) optimism Future pessimism = deflation or prospect for tax increase contain private investment demand which in turn keeps interest rate low Future optimism = room of tax (especially consumption tax) increase relative to other countries. secure more or less confidence from (at least domestic) investors. 10

11 France Germany Japan Sweden UK US OECDAverage Source* OECD revenue statistics 11

12 Japan s consumption tax rate is the lowest among major countries. There is room to increase tax rate Source: MOF 12

13 Future pessimism and optimism may be revised: Abenomics becomes excessively successful Future optimism enhances private investment or banks become more willing to lend Traditional crowding out effect prevails. It may be turned out that the government lacks leadership or willingness to undertake fiscal consolidation by raising tax (as well as by cutting expenditure) Leaking basket =The gov. announced 5 trillion yen spending and tax cut to compensate VAT increase to 8% in FY Additional 2% VAT increase in FY 2015 is not certain yet. 13

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15 Policy decisions can be divided into several dimensions involving Necessity and size of tax increase Timing of tax increase Items or composition of tax increase Macro simulation has mostly focused on the first two addressing quantitative nature of fiscal consolidation but there remain more qualitative question Why it must be consumption tax (VAT) to be increased. 15

16 J.Arnold (2008) 16

17 Consumption tax burden accrues to the final consumption domestically and internationally. It is not accumulated at the production stages that assures the production efficiency It does not undermine international competitiveness. In contrast, CIT distorts both production efficiency and international competitiveness. Key feature Tax refund/credit mechanism Destination principle Economic consequence Production efficiency (preserving investment incentives) International competitiveness 17

18 Y sector Mirrlees and Diamond (1971); The production efficiency should be a part of the second best tax policy. Production frontier D X F( Y, K, L) 0 Point D fails to Utilize maximal capacity of Production 18 X sector

19 Consumption tax increase does not undermine international competitiveness of domestic producers Consumption tax follows destination principle Fiscal devaluation = moving away from source based taxation such as CIT and social security contribution toward destination based taxation Tax principle Tax Export Import Destination principle Source/origin principle VAT No tax Tax CIT (in most countries) Tax No tax 19

20 Many countries have initiated tax reform moving away from CIT toward VAT Corporate income tax rate including local tax Germany 2007~2008 UK 2011~ % 29.83% 28% 20% ( ) VAT rate 16% 19% 17.5% 20% Others Top PI tax rate 42% 45% Bank tax : 0.075% : 0.142% 20

21 GDP Ratio Tax revenue VAT(Japan) VAT(OECDaverage) CIT(Japan) CIT(OECDaverage) 21

22 In most macro simulation, economic effects of consumption tax (VAT) are associated with (i) consumption-labor and (ii) inter-temporal consumption decisions. VAT = Tax equivalence of labor/wage taxation Impact Economic effects Quantitative measurements Permanent Labor supply Elasticity of labor supply Temporal (when tax rates are changed) Saving Inter-temporal elasticity of substitution 22

23 Efficiency is not only value judgment in economics. Equity consideration must be addressed The representative agent model often forgets equity issue. Regressive nature (from annual income perspective) must be mitigated There must be income support for (truly) low income households Refundable tax credit (like Canada GST credit) Reduced tax rate on necessity goods? 23

24 Benefit principle Ability to pay principle Annual income Life time income Consumption tax Will improve intergenerational equity Is regressive and thus inequitable May be more or less proportional 24

25 Consumption tax is more advantageous than other taxes such as CIT in globalized era that it preserves scope of growth preserving (i) the production efficiency and (ii) international competitiveness. It is tax on consumers (with some exception for unregistered business) that will meet the second best efficiency but thus is susceptible to criticism of regressive tax Surely economists may like consumption tax but ordinal people do not. Question remains how to gain consensus of further consumption tax increase. 25

26 Another complication occurs with the unified social expenditure and tax reform that involves consumption tax increase up to 10%. The reform ties the use of consumption tax to social spending. Can we explicitly propose consumption tax increase to secure fiscal sustainability that requires primary fiscal surplus? Primary fiscal surplus =tax expenditure > 0 The surplus is additional consumption tax revenue that is not directed to social spending! 26