Abe's Taxzilla Contracts Japan's Economy

When the government of Japanese Prime Minister Shinzo Abe announced that they were going to raise the consumption tax from 5% to 8% in April to pay down Japan's budget debt, I had to shake my head.

The Japanese economy has been in the doldrums since the bubble burst in the 1990s and the government desired to give it a big boost. But raising the consumption tax was not the way to do it. Raising the consumption tax would be a sure-fire way to put a major damper on the Japanese economy. What I thought would happen, did happen.

Also, the Abe government announced that they may raise the consumption tax again to 10%. Again, I had to shake my head.

What was the result of the 3% tax hike that took effect in April?

Here's what Bloomberg.com posted:

Japan’s economy contracted more than the government initially estimated, highlighting the challenge for Prime Minister Shinzo Abe in steering the nation through the aftermath of a sales-tax increase. 

Gross domestic product contracted an annualized 7.1 percent in the three months through June, more than a preliminary reading of a 6.8 percent fall, the Cabinet Office said today in Tokyo. The median forecast of 25 economists surveyed by Bloomberg News was for a 7 percent drop. 

When the tax hike was announced, I thought then that it was the wrong way to go if the government really wanted to re-ignite the economy and generate revenue to pay down the deficit.

The route they should have taken was what President Reagan did in the 1980s: cut taxes. The tax cuts and de-regulation measures the Reagan Administration instituted re-ignited the U.S. economy. The tax cuts actually generated more revenue for the government as it provided incentives for business to expand and gave taxpayers more pocket money to spend. Unfortunately, instead of paying down the U.S. deficit, the Democrat-controlled Congress spent more. 

By raising taxes, people will tighten their belts and spend less. That is simple human nature. In Japan, consumers did tighten their belts and the Japanese economy contracted. This was the opposite effect of what the Abe government wanted. And they want to raise the consumption tax again by another 2%?! It will be sheer stupidity if they follow through and raise the consumption tax again.

Won't they ever learn?

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