Japan: An incomprehensible tax policy

The VAT hike in Japan has once again led to a drastic decline in domestic demand in late 2019. Successive Japanese governments have chosen to hike VAT rates and cut taxes on corporate earnings. This choice is incomprehensible since: Japan’s problem is first of all the abnormally low level of wages and therefore of household consumption; taxing consumption via VAT is then obviously counterproductive; Corporate profitability is abnormally high due to the skewing of income distribution at the expense of wages in Japan: earnings are practically twice the level needed to finance investments. Taxes on corporate earnings should therefore be increased to encourage companies to increase wages and not reduce them. Japan should therefore implement the opposite tax policy; over the past 20 years, these repeated tax policy errors have been corrected by fiscal deficits to restore demand.