Can you explain this to me like a 5 yr old? "How are tax increases supposed to help?"

[NorthByNorthwest]

It seems that the DPJ has finally gotten their way for an increase in consumption tax:

=> DPJ, opposition parties OK social security, tax reform bills revision

However, organizations like the IMF are already telling Japan that the number ought to be 15% (!), not 10%.

=> Japan should seek bigger sales tax hike than current goal: IMF

And, Democratic bloggers like Hoofin' - although he no longer lives in Japan and is no longer directly affected by such measures - seems to support these tax increases whole-heartedly:

=> Japan’s DPJ, LDP, and Komeito together on hiking the consumption tax to 10%.

The real news about the 10% consumption tax is that now Japan is finally creating a dedicated system of revenue to cover the basic pension. As I was saying the other day, practically all the other advanced countries in the world have this, including the US with its payroll tax.

The people who say this will slow down the Japanese economy are wrong. If this money is turned around, and paid as social welfare benefits, it is simply the transfer of consumption from one set of consumers to another set.

I am frankly skeptical about the claim that an increase in consumption tax won't slow down the Japanese economy.

My observation is that the last time Socialist PM Murayama increased the consumption tax from 3% to 5% 18 years ago, there was a negative effect - and it killed any recovery that was happening at the time.

However, I'm not an economist, and I "just don't understand", I'm told.

So, how am I supposed to reconcile my primitive views on taxes and the economy with recent articles like this one?

=> Domestic Gains Spur Japan's Recovery

ASIA NEWS Updated June 18, 2012, 12:26 p.m. ET

Domestic Gains Spur Japan's Recovery
By TATSUO ITO

TOKYO―The Bank of Japan said domestic demand rather than overseas exports was the driving force for economic growth for the first time in at least 20 years, as the euro-zone crisis and slow U.S. growth continue to suppress global demand.

The BOJ upgraded its overall assessment of the economy, crediting activity following the March 2011 earthquake and tsunami in northern Japan.

"Japan's economic activity has started picking up moderately as domestic demand remains firm, mainly supported by reconstruction-related demand," the central bank said in its monthly report.

A rise in domestic demand would be a welcome development for the BOJ, because wage growth is seen as the best way to break the long-running deflationary cycle that has seen price rises remain around zero.

Still, the BOJ remains cautious about prospects overseas as the euro-zone crisis sparked by Greece continues to grind away. "There remains a high degree of uncertainty in the global economy," the BOJ said, adding that particular attention should be paid to "developments in global financial markets" amid the European debt crisis.

After the collapse of the asset-inflated bubble in early 1990s, growth in Japan's economy has almost always been driven by its strong exports, as domestic demand largely stagnated. But it appears that things are different this time, as global demand falters amid the euro-zone debt crisis and continued weak growth in the U.S.

The consensus among private-sector economists is for a slowdown in growth to around 1.9% annually in the April-June period, but they don't see a return to an overall economic contraction. Instead, consumer spending, which accounts for about 60% of the economy, has firmed as people buy eco-friendly and fuel-efficient cars and housing.

Consumers now appear more willing to undertake discretionary spending following self-imposed restraint after last year's disasters.

"There is no doubt that domestic demand is now the key driver," said a person familiar with the BOJ.

Some private-sector economists say the economy could be supported, at least for this year, without a surge in exports. With Japan's long-running deflation, individual wages were stagnant in 2011, falling 0.2% from a year earlier.

"Exports are unlikely to be a factor that drags down the economy," said Akihiko Suzuki, chief economist at Mitsubishi UFJ Research & Consulting. "The focus is on whether or not wages will increase" to facilitate a self-sustainable recovery, he added.

The authorities aren't banking on an "export-free" recovery, saying that the traditional reliance on exports is still a critical factor, representing 15.1% of GDP for the fiscal year ended March.

The central bank sees a rise in exports and production as a precondition for the Japanese economy to embark on a full-blown recovery. "Japan's economy is expected to return to a moderate recovery path as domestic demand remains firm and overseas economies emerge from a period of deceleration," it said.

Write to Tatsuo Ito at tatsuo.ito@dowjones.com

[Trichophyton-in-my-pants]

Not an expert on the matter, but here is my two cents.

- Countries with higher consumption tax have a much higher average income than Japan --> Raising consumption tax would in the long run lead to increase in salaries --> More buying power to consumers.
- Raising the consumption tax will lead to higher prices of consumer goods in the short term and long term (higher markup price of commodities to balance out the loss in sales) --> As irrational as it sounds, this would lead to fiscal money being allocated more to retail rather than manufacturing.

In the short term, people would probably spend less, but in the long run when the pricing scheme settles down to a comfortable equilibrium, on average people would spend more on commodities (not necessarily buy more, but spend more) --> More money from taxes to the government --> More money for pensions --> Higher buying power for the elderly --> Repeat cycle.

Lastly, the tax hike would not have a negative effect on consumer savings, but rather limits the purchasing power of individuals --> More money is put in the bank --> After a certain threshold, any additional money would be spent --> In the long run, the consumer spending would bounce back as people start to spend the savings on consumer goods --> Cue above point.

But yeah, people are not rational.

[TJrandom]

The bottom line is that politicians are never going to reduce wasteful spending – since waste in my eyes, is vote buying in theirs. So the government is going to continue to waste my taxes – that must be taken as a given. The deficit is the big bull in the china shop – and needs to come down. The only way to do this is to raise taxes. The risk is of course – that additional wasteful spending may well be implemented to take up those additional taxes.

IMO, there would have been much better options for a new tax basis – such as on real estate holdings, on funds on deposit, on fallow farm land, on whale meat, on luxury cars, on resorts, on sin industries, and most particularly – on capital gains and on inheritance.

[Guru]

Another tax and spend schtick from public servants. That's the answer, I believe. The world would be a better place when all career politicans drop dead....

Japan needs an austerity package in a massive scale to wean freeloaders off the tax-money-financed-social-service-support programs before even thinking about raising taxes on me.

[shonanfred]

Like you are a 5 year-old or I am a 5 year-old?
Fred

[1standarduser]

For maybe a 7 year old:
If you make everyone have to pay for daily items (consumption tax), it helps the rich people avoid paying their fair share.

For a 5 year old:
When you allow a bully to take from the other kids, but not share his own, than you have less toys for everyone.

[ironist]

Japan needs an austerity package in a massive scale to wean freeloaders off the tax-money-financed-social-service-support programs before even thinking about raising taxes on me.

Yeah! Austerity and trickle-down economics always work so well!

Anyway, the tax increase is desperately needed. VATs are generally positive economically and Japan is actually pretty out of step with other industrialized economies in terms of a broad tax base. The country's tax as a percentage of GDP is way too low.

[Guru]

Yeah! Austerity and trickle-down economics always work so well!

Anyway, the tax increase is desperately needed. VATs are generally positive economically and Japan is actually pretty out of step with other industrialized economies in terms of a broad tax base. The country's tax as a percentage of GDP is way too low.

No, I just want the austerity package so that I don't need to pitch in my tax money more than I do now. I just don't care about trickel-down economics, if that even exists in reality. People should pay for services they get to the best of their ability. By looking at Japan, for example, many people are not doing their best as some people even bother to take a lunch break. I don't like free loader on my expenses.