Sunday, March 4, 2012

In 1949, Japan Started on the Road to Prosperity by Eliminating Sales Tax! Let's Dream a Dream for Japan Again!!

Besides eliminating sales tax, Japan also pegged the yen to gold and lowered income tax rates. I've written over and over that increasing sales tax is not the answer to Japan's problems. Tax increases without cuts won't help us. We need to cut spending and cut taxes and return the yen to a stable currency.

Akihabara in 1945 and 2001

Need proof? It worked in Japan after the war to create the greatest economic recovery the world has ever seen!

Forbes Magazine writes in an article from Feb. 3, 2012: Let's Dream a Dream for Greece:

Japan’s recovery started with a dream, among politicians and business leaders. In their imagination, Japan would rise from the ashes – actual, real-life ashes – and become again a great and prosperous nation.
This clear vision quickly led to a plan of action. The situation in 1949, of hyperinflation and crushing taxes, was plainly not in accordance with the goal of a prosperous Japan, so the leaders set about fixing the problem.
They had virtually no resources to do so. The economy consisted mostly of black-market subsistence, tax revenues were negligible, and issuing debt was impossible. Since tax revenue was far less than the government’s needs, the government subsisted mostly by printing money, with the usual consequences.
One of the first things they did was to make government debt issuance illegal. It remained so until 1965. Then they refused any more economic aid.
In 1949, they pegged the yen to gold, immediately ending the hyperinflation.
Then, they eliminated the consumption tax (national sales tax).

Japanese gold coins from the 1850s

In 1950, the income tax schedule was revised. The top rate fell to 55% from 85%. But more importantly, the income at which that rate (and others) applied was raised dramatically.  This rate originally applied to income of 500,000 yen. By 1957, the 55% tax bracket applied to income of 10 million yen, twenty times higher.
In 1951, interest and dividend income were taxed at a separate, lower rate. In 1953, capital gains were exempted from taxation completely. Interest income was taxed at only 10 percent. Businesses received a truckload of favorable treatments, in the form of accelerated depreciation, deductions, and exemptions. In 1955, interest income was made tax-free.
Throughout the 1950s and 1960s, the government had a specific goal: to keep tax revenues, and the size of the government, below 20% of GDP. They reasoned that this would be best for the brisk growth of the private sector. It worked.
The Japanese people, as we know, became wealthy in those years. Wealthy people are able to pay more in taxes than poor people. Between 1950 and 1970, tax revenues of the central government increased by sixteen times, all in non-inflationary gold-linked yen.
As the country became wealthier, and GDP grew, then the services that the government could provide on a budget of 20% of GDP grew as well. Welfare and national healthcare plans were added. Dirt roads were paved. Sewage systems were built. There was no conflict between government services and the private sector. Both became prosperous together.
This story is well known to those who follow such things.

Read more here.

Thanks to Aaron Egon Moser


Martin J Frid said...

What I don't understand is why Japan does not abandon its crazy inheritance tax. Countries like Sweden has abandoned it. Why should the country benefit when you die, if you own property, and want someone to inherit it according to your will?

Marc Sheffner said...

Very interesting historical facts. I'll print this out and use it in my next "Real Economics" Study Group. Thanks!

Anonymous said...

I'm not sure that comment went through, so i try again:

The photo, Japanese gold coins from the 1850s... I stretched my hand out towards the screen grasping.

Can you get me one of those? Ah, nevermind, the shipping costs would be too great.

Martin J Frid asked, "What I don't understand is why Japan does not abandon its crazy inheritance tax."

Answer: Because we are ruled and it's the outcome the rulers want.

It's like those photos of the before and after of Japanese cities as shown on this blog.

The enormity of the destruction is (I think) lost on most People who haven't been there to see what it is now vs. the destruction. I imagine it's even more-so for those who know it well.

- clark

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