Tax Analysts Blog

Democrats Should View Japan as a Warning

Posted on Dec 17, 2012

Raising taxes in the middle of a weak economy is usually political suicide. Herbert Hoover did it in 1932 and condemned the Republican Party to decades of rebuilding. Bill Clinton did it in 1993 and watched as the GOP took control of Congress in 1994 for the first time in decades. And now President Obama is determined to do it, relying on a mandate from his November victory over Mitt Romney. Obama and congressional Democrats want to increase taxes on high-income taxpayers as the price of averting the fiscal cliff.

Voters simply don’t like tax increases, and ruling parties frequently pay for their displeasure. Japanese Prime Minister Yoshihiko Noda pushed through a bill doubling Japan’s unpopular VAT from 5 percent to 10 percent in the summer. Over the weekend, his party suffered a crippling defeat at the polls as the conservative Liberal Democratic Party (LDP) won around 300 of the 480 seats in the lower house of the Japanese parliament. The ruling Democratic Party won only 50 seats, with eight Cabinet ministers losing (the most since World War II). The VAT increase, a stagnant economy wracked by deflation, and the slow recovery from the tsunami doomed Noda and set the stage for a revival of the LDP, which only three years ago was seen as on the verge of irrelevance.

This should sound familiar to American readers. The GOP just lost its second presidential election in a row and faces the problems of a shrinking base and an increasingly out-of-touch economic message. Commentators have said that the party must broaden its appeal by moving to the center on social issues and softening its positions on entitlement spending and taxes. Obama’s ability to tie Republicans (and particularly Romney) to tax policies that favored only wealthy Americans was seen as crucial to his win.

But maybe Republicans only need to get past the fiscal cliff before they can enjoy a revival similar to the LDP. Obama wants to raise taxes. The only question is how broad of an increase will occur on January 1. While the president’s plan will primarily affect only taxpayers with incomes over $200,000, parts of it will probably be felt by everyone, at least indirectly. The costs of Obamacare, the rise in dividend and capital gains rates, the looming medical device excise tax, and the expiration of the payroll tax cut will hit the entire tax base. Taxes are going up and -- Democratic rhetoric aside -- not just on the rich.

How will such a broad tax increase be received by voters? If history is any guide, not well. Japan’s electorate has always swiftly punished any politician who dared to raise consumption taxes. Noda’s catastrophic defeat is no exception. (In fact, it might have destroyed the Democratic Party of Japan entirely.) Voters in the United States don’t usually deliver such decisive results (our parties are too entrenched), but 1932, 1994, and 2010 should loom large in any policymaker’s mind.

Obama thinks he has a mandate on tax policy. Polls show most Americans blame the Republicans for the fiscal cliff quagmire. The pressure is on the GOP to make a deal. And Boehner needs to do just that. There is no question that Democrats have won this round and that Republicans need to find a way to put the entire fiscal cliff behind them or risk further damaging their reputation and appeal. But if Boehner can find a way to get a fiscal cliff deal through the House that is tied closely to the president, the debate might flip in his favor, just like it did for the LDP in Japan.

A responsible tax increase on the wealthy might put the nation on a slightly improved fiscal path, just like a VAT increase did in Japan. The LDP will reap the rewards of Noda’s political sacrifice. If Republicans can find a way to vote against a bill that largely avoids the fiscal cliff (in other words, that extends the 2001 and 2003 tax cuts for most taxpayers) but still allow the bill to pass, they might be able to use runaway spending and the tax increases that do go into effect in 2013 and 2014 against Democrats in the next few elections. While Obama should be looking warily at Noda’s fate, congressional Democrats and potential 2016 presidential candidates should be even more worried. They might end up paying the price for Obama’s supposed mandate to raise taxes.

Read Comments (3)

Randy JacksonDec 17, 2012

The only problem with the Japan analogy is that in fact the consumption tax
increase passed because the LDP voted for it. Noda faced a revolt within his
DPJ against the tax increase and so cut a deal with the LDP who supported the
tax in return for early elections.

Jeremy ScottDec 17, 2012

I think that reinforces the analogy. Like the LDP, the GOP will also have to vote for a tax increase in order for a deal to pass the House. The key for
Boehner (if he wants to emulate the LDP's comeback) is to somehow make a deal that is tied to the president, so that Obama and Democrats will be blamed for the tax increase despite Republican support.

the VAT bastardDec 19, 2012

All roads lead to VAT, my friends.

Excessive reliance on the income tax as your nation's dominant revenue tool may
have made sense last century. But the tax is an awkward fit for the age of
globalization and capital mobility. Japan has already learned this lesson,
America will learn it eventually. Soon we shall require an alternate revenue
source to pay the bills, because the income tax ain't getting it done. The
leading candidates are a carbon tax or VAT -- or continued deficit spending
until the bond market says the party is over.

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