Today's The Wall Street Journal has two seemingly unrelated stories. The first is in the "World" section entitled: "Japan GDP Shrinks at Fastest Pace in More Than Five Years", the other is in the "US" section entitled: "Lew: Imperative for Congress to Solve Inversion Problem". At first glance the flight of US multinationals and Japan's continued economic woes are not connected. However, delve into the stories a little bit and it becomes obvious that both of these articles are reporting on national crises created by bad tax policy choices.
Japan's problem is that, after a spurt of expansionary policy changes called "Abenomics", name after Japan's Prime Minister Shinzo Abe, the country then hiked the national sales tax from 5% to 8% (a 60% increase). The hike resulted in a 7.1% shrink in Japan's GDP. Now, to be fair, there are plenty of other factors at work here causing Japan's continued economic stagnation, but the massive increase in what is a consumption tax hit consumers' pockets in Japan very hard. Over the relevant period, consumer prices jumped 3.4% while salaries only grew 1.6%; more over, the expectation is for that consumption tax to increase to 10% next year, further eroding consumers' purchasing power. The end result is that people bought less goods and saved for cost increases in their future and the economy wilted. This was an easily predictable result. Basic economics 101 analysis says that when prices increase, consumption decreases. When consumption represents the back bone of the modern economy, even small changes in cost can result in big disruptions.
The US's problem is that its corporate tax, and non-territorial tax system, are globally uncompetitive. With the USA's 35% corporate tax rate, and the fact that it taxes income repatriated from other countries, US based multinationals are pursuing aggressive tax strategies to minimize the cost of these terrible policies. One of the ways companies do this is through an "Inversion". This is essentially where the US company merges with a foreign company and makes the foreign company's country of origin it's headquarters and place of incorporation. The new company then buys debt from what is now its US subsidiary and use the debt on the books of the US sub to minimize its US tax burden. This results in all the company's global profits being taxed at the much lower foreign business tax rate instead of the much higher US rate. And because of the US's non-territorial system, these profits will never be repatriated into the US because the company would face a tax penalty. So the profits are used to expand operations in foreign markets instead of investing in the US market.
The politicians' response to the US crisis is predictable. They took turns getting in front of the media and tried to bully companies into not leaving the country. When this failed, they then moved on to insisting there be tax policy changes to keep this from happening. The sensible response to a crisis created by bad policy would be to improve the policy, namely make US corporate tax globally competitive. Of course, that would mean accepting declining tax revenue, so obviously that isn't what happened. Instead, President Obama is pushing to change how the IRS interprets existing regulations while congress is trying to create new tax laws to penalize companies for doing inversions. Essentially, their response to high costs causing companies to leave is to increase costs. Fortunately, congress can't even agree on the weather outside, let alone tax policy changes, so I expect most of this hew and cry to have no tangible results. What policy response will come out of Japan from their crisis is yet unclear. But expect more bureaucratic incompetence.
The problems in Japan and the USA are strait forward, but politicians lack the political will to make the necessary changes to fix them. The end result is that change must come from people in the voting booths. Bill Clinton defeated sitting president George H. W. Bush with the slogan: "It's the economy, stupid!" This was in response to Bush reneging on his promise not to raise taxes and the economy suffering as a result. Today I would like to create a new slogan to be chanted at every politician when they start whining about the very obvious economic response to their bad tax policy decisions, its: "It's high taxes, stupid!". Or, for when regulators don't understand how the ever increasing burden of their laws harm the economy: "It's the regulatory burden on business, stupid!" The economic problems in much of the first world can be boiled down to these two statements.
No comments:
Post a Comment