In an effort to battle Japan's Godzilla-sized national debt (230 percent of GDP and rising), Prime Minister Noda of Japan pushed through a doubling of the consumption tax--from five to ten percent--in the face of defections by party loyalists and a no-confidence vote.

Noda acted against his own and his party's self-interests to accomplish something easily demagogued and highly unpopular but absolutely necessary. And just as importantly, given the options before him, he used his political capital to raise taxes the right way.

Japan's consumption tax is a national sales tax, not a VAT. It's a tax on every citizen who consumes. So is a VAT (so are all corporate income taxes), but the VAT (and corporate incomes taxes) are a lot sneakier about it.

The VAT has got to be the worst tax in the world, if for no other reason than its name: Value Added Tax. The last thing any government wants to do is tax "added value." A sane government wants to create more added value throughout the supply chain, not discourage it.

To quote Wikipedia:

From the perspective of the buyer, [the VAT] is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs.

If you've already said, "Huh? What?" that's the biggest problem with the VAT (and most tax regimes): their sheer complexity.

Rent-seekers and politicians prefer laws opaque to the average person. They can then shower freebies on the voters (that the voters ultimately pay for) while squirming through the loopholes without anybody figuring out what they're up to until they've raked in the dough.

This is the problem with OWS types wanting to tax the "fat cats." I doubt any of them could complete a 1040 long form by hand, let alone examine the books of the locally-owned grocer on the corner and be able to tell whether or not it's paying its "fair share."

And they think a thousand more such laws will ensure that Bank of America will? Or will a thousand more laws ensure that the "fat cats" can squeeze out competitors who can't afford to hire entire law firms to assure compliance?

If you're interested in financial "fairness," then start by making the tax code simple enough that you can understand it. I don't mean the cute slogans and oh-so-earnest demonstrations. I mean the real-world implementation of the tax laws. The fine print.

The IRS itself admits that

The costs of complying with the individual and corporate income tax requirements in 2006 amounted to $193 billion. If tax compliance were an industry, it would be one of the largest in the United States. The current tax code is 3.7 million words long, having tripled in length since 1975.

Politicians who peddle Rube Goldberg schemes in the name of "fairness" will always deliver the former and never the latter.

A sales tax, by contrast, is easy. It's obvious. Look at the receipt. That's what you paid. It's also simple to exempt "good" stuff like food. Yes, exempting stuff will lead to rent-seeking too, but at least it'll be obvious what is and what isn't on the list.

And there's no way a politician can get away with populist drivel about sticking it to someone else.

In terms of idealistic solutions, I'd prefer a flat tax solution (including treating all income streams the same and paying all government obligations out of general revenue). But as long as we're pondering impossibilities, it wouldn't kill me if these guys got their way either.

Labels: economics, japan, politics, taxes