TIME FOR A REAGAN TAX CUT--IN JAPAN?
Whatever its vaunted benefits, slashing taxes is no longer regarded as a panacea for the U.S. economy. Indeed, many observers believe the hefty tax cuts of the early Reagan era set off a chain reaction of effects that are largely responsible for America's current malaise. These include rising federal deficits, high real interest rates, an overvalued dollar, ballooning trade deficits, and soaring consumption.
Ironically, however, it is the likelihood of just such effects that is now inspiring some economists to prescribe tax-cut therapy for one of America's major trading partners: Japan. "The Japanese," says John H. Makin of the American Enterprise Institute, "need to cut taxes massively, by at least 10 trillion yen--or 2% of gross domestic product."
As Makin sees it, three developments support such a drastic move:
The first is the mounting pressure from Japan's trading partners for it to reduce the trade surplus, which has more than doubled since 1990, to $107 billion (chart). Although much of this increase results from yen appreciation and an import decline caused by the domestic recession, such explanations are cold comfort to the U.S. and the European Community, whose trade deficits with Japan are on the upswing.
Second, the Japanese economy, which has shrunk in the past two quarters, seems to be imploding. Personal saving is rising sharply. Consumer spending, which accounts for 58% of GDP, has been plummeting, and industrial output continues to slide. About one-third of the nation's wealth, or $8 trillion worth of real estate and stock market values, has evaporated since Japan's speculative bubble burst in 1989.
Finally, without a Japanese recovery, the U.S.-Japanese trade gap will widen sharply again. That's because Japanese industry is plagued with idle capacity, while America's appetite for imports will grow as the expansion gathers steam. "Unless Japan stimulates domestic consumption and thus provides a market for its manufacturing base," says Makin, "we're likely to see escalating trade tensions and more trade restrictions."
The beauty of a tax cut, he argues, is that it is far more appropriate in a high-saving country such as Japan than in a low-saving one such as the U.S. Not only has Japan's overall government budget been in the black for several years, but its personal saving rate also remains extremely high. And that, plus its huge trade surplus, suggests that the currency appreciation and trade correction that would follow a tax cut would merely reduce the surplus, not eliminate it.
In short, says Makin, a large tax cut would revive the sagging Japanese economy, reduce its trade surplus and the dangerous trade tensions it entails, improve the lot of Japanese consumers, and help to ensure a global economic recovery by 1994.GENE KORETZ