Richard Katz (The Oriental Economist)
In his comment, Miyao accuses me of both factual errors and "misleading" comments. He also has substantive disagreement on several key issues.
1) Misspelling of Hiromitsu Ishi's last name. The name was spelled correctly in my original manuscript; however, in the editing process, an extra "i" was added and I failed to notice the change. My apologies to Mr. Ishi.
2) Misleading comments on net tax cuts. I believe that Miyao-san has Mr. Shiokawa's position wrong. The MOF bureaucrats have insisted that any tax cuts in one area be matched by simultaneous tax hikes elsewhere, so as to preserve revenue neutrality. Shiokawa has simply said that tax cuts in one year could be made up a few years down the road so as to provide a temporary tax cut. Mr. Takenaka has discussed financing tax cuts by spending cuts. While overall tax revenue would decline, the spending cuts have to be large enough to comply with Mr. Koizumi's insistence on the primary of deficit reduction. From a macroeconomic standpoint, this is hardly stimulative. However, as with Shiokawa, there is some discussion in the Takenaka camp of the timing of the process so as to provide some temporary macroeconomic stimulus. It is well known that Takenaka's personal views on such issues are not always the same as the PM's.
Contrary to Miyao-san's accusation, it is hardly misleading to say that "Takenaka wishes to balance the budget while reducing corporate taxes." That is exactly what Koizumi and Takenaka propose as their long-term program: cut business taxes, cut taxes on upper income people, raises taxes on lower middle income people, and move toward a balanced "primary" (i.e. exclusive of interest payments) budget.
3) Miyao-san says Takenaka "insist(s) on tax cuts, especially corporate taxes, to stimulate business activities." Mr. Takenaka (and Mr. Miyao) may believe such tax cuts are stimulative, but that doesn't make it so. Japan has repeatedly tried to overcome its chronic investment-savings gap by stimulating private investment. The result has been a series of temporary fillips followed by excess capacity and more bad debt. As the OECD, among others, now recognizes, Japan has too much investment (i.e. an excessive investment:GDP ratio) for a country with its growth rate. Car companies that can produce 14 million cars a year, but can only sell 10-11, are not going to expand capacity no matter how much Takenaka cuts their taxes. And, if they did, it would only make the situation worse.
4) Miyao-san says, "Takenaka's proposal for flattening tax rates is better than the MOF version..." Whether Takenaka is better than the MOF is hardly the issue. The issue is whether Takenaka's proposals provide a genuine cure for Japan's problems.
Almost two decades ago, the Maekawa Commission recognized that, to solve its chronic problem of insufficient aggregate demand, Japan had to move from investment-led growth to consumption-led growth. The Maekawa Commission is right. Do Takenaka's proposals advance that necessary shift, or do they hinder it? I believe they hinder it. They continue to shift the share of national income from high-spending lower middle class people to high-savings firms and rich people. That hurts consumer spending. This is "reform that is not reform."
5) Regarding real estate taxes. Miyao-san claims the "real estate market was more or less 'normal' before the collapse of the land market in the 1990s." Does he really believe that it is "normal" for the land underneath the Imperial Palace to be worth more than all of California? Most people think the market was not normal, but an enormous bubble. Does he really believe that the current holders of land, real estate interests and farmers, have "lost much of their lobbying power." If so, then Takenaka disagrees. He'd like to see reform of real estate taxes that give greater incentives for development of property and fewer for holding onto fallow property. However, the power of the real estate lobby has made him conclude that this has no chance of passage and so he is not even including it in his recommendations. My own political judgment is that this is a fight worth having. Even if Koizumi loses the battle; reformers will end up winning the war.
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