Japan’s ‘Lost Generation’ of Economic Growth: Blame High Taxes

By John Fund

Sunday, November 19, 2017

Tokyo — Following the House’s passage of a tax-reform bill, critics have denounced it as being everything from “selfish” to “destructive.” But if they’re honest, most of those critics will admit they want to expand government and increase taxes, a policy that helped stall the U.S. economy to the point where we had less than 2 percent annual economic growth during Obama’s years in office.

If you want to see the impact that a high-tax, big-government model can have on a country over time, head to Japan, where this week I was invited to address the first Policy Innovation Summit. The event was co-sponsored by the Pacific Alliance Institute and Americans for Tax Reform.

The reason the Japanese want to explore new ideas is simple. Since 1990, the country has experienced a “lost generation” of economic growth: Output has increased less than 1 percent a year. Despite more than 20 government “stimulus” packages since 1990, the Japanese economy has suffered at least eight significant recessions. Government debt has climbed from 65 percent of gross domestic product to more than 275 percent in the last generation.

This record is completely the opposite of the “economic miracle” that allowed Japan to rise Phoenix-like from the ashes of World War II and become an export superpower. What is different? Well, in addition to the introduction of democracy and the strengthening of property rights after the war, Japan pursued a low-tax, low-regulation economic policy. As late as 1965, Japan’s tax burden as a percentage of its overall economy was only 17 percent.

Today, with the introduction of a value-added tax and plethora of other new taxes, the tax burden is 33 percent, still just below the average of all industrialized nations. But that is the fastest tax increase that any of those countries experienced, and Japan’s standing in the Index of Economic Freedom of the World, published by the Heritage Foundation, has fallen, from eighth place in 1990 down to the 39th in 2017. As free-market economist Dan Mitchell told the Innovation Summit: “Japan’s economic freedom hasn’t gone down so much as other nations have adopted more liberal policies. If you are walking slow or standing still while others are jogging, you will lose the economic race.”

Taxes contributed to that sorry slide, but over-regulation added to the problem: During a period of globalization and reform elsewhere in the world, the Japanese government bought controlling stakes in more than 50 large companies and failed to repeal Japan’s anti-consumer policies. Even after a recent reduction in the tax rate, Japan has the second-highest corporate tax rate in the world. The only one that’s higher is that of the U.S., and a reduction of our top rate is a central component of the tax-reform bill passed by the House last week.

Japan also faces a challenge that we don’t have in the United States, where immigration, both legal and illegal, has blurred the impact of a reduction in live births among the native population. Japan, which has very little immigration, is slowly dying. It ranks 184th out of 200 countries in its birth rate. The country has lost 1 million people out of its population of 128 million in just the last seven years. As the Los Angeles Times reported in July 2016:

The country has begun a white-knuckle ride in which it will shed about one-third of its population — 40 million people — by 2060, experts predict. In 30 years, 39 percent of Japan’s population will be 65 or older. . . . Each year, the nation is shuttering 500 schools.

Obviously, the experience of Japan is not wholly transferable to the U.S. But the transformation of Japan’s low-tax, low-regulation model into nearly its opposite is a cautionary tale. If we want to follow Japan’s example and suffer a continuation of the Obama administration’s puny economic growth, all we have to do is nothing. We can watch as other nations pass us by. The key to revitalizing the American economy and creating good jobs is to pass tax reform this year. It will be no panacea, but the absence of real structural changes in our tax code for the past 30 years has clearly set us back. Now is the time to seize the opportunity for change. If we flub it, we could face a Japanese-style sluggish economy that could sap our innovative spirit and also create social tensions.