Japan and Europe Are Killing Themselves

They are taxing themselves to death

By Jeorge Giddeon

Can the U.S. lead the world back to prosperity? The global economy is lurching toward the cliff. Twice before over the last 75 years Washington took the necessary action, and after November, with a new President and Congress, there will be the opportunity—and imperative—to do so again.

The 1970s were a decade of economic turmoil and stagnation. The 1930s were far worse. And now the world is headed to the brink again.

After the Great Depression and the Second World War the U.S. helped create and nurture the institutions that enabled war-torn Europe and Japan to make rapid recoveries. The gold-based Bretton Woods monetary system provided the currency stability necessary for the resumption of international trade. The General Agreement on Tariffs & Trade (and then its successor, the World Trade Organization) systematically reduced trade barriers. At home we ended wartime controls and rationing, cut taxes and slashed government spending. Almost seamlessly, millions of veterans came home to productive civilian employment. For the next 25 years Japan and Germany repeatedly reduced their tax burdens and became economic global giants.

The destruction of Bretton Woods in the early 1970s led to a horrific, inflation-wracked decade. The U.S. experienced a stagnant economy and rising inflation and was seen as a malaise-ridden nation in irreversible decline.

But then came Ronald Reagan, who killed the terrible inflation of the 1970s, sharply reduced income tax rates and pushed deregulation. Most of the world followed suit, with countries such as socialist Sweden hacking away at their sky-high tax levies. Along with a forceful foreign policy backed by a resurgent military, Reagan’s policies brought about the demise of the Soviet Union, and the world experienced an unprecedented economic boom as hundreds of millions of people joined the middle class.

But since 2007 the world has been in an economic crisis.

Each of these disasters was the result of catastrophic government policy errors.

Today Europe is choking on excess spending, taxation and regulation and a flood of cheap money. Its feckless politicians won’t cut spending nearly enough. Worse, they saddle their countries with ever more growth-killing taxation. Europe is following the path it did in the early 1930s. This time, thankfully, we haven’t blown up the international trade system as we did back then.

It’s not only Greece and other European countries that are falling apart. The media have paid little attention to the fact that the third-largest economy in the world today, Japan, has been strangling its economy since the early 1990s. FORBES columnist Nathan Lewis, a noted economist and money manager, recalled recently that when asked about Japan’s prospects seven years ago he blurted out: “They will tax themselves to death.” And that is precisely what Tokyo continues to do.

Japan’s political leaders are more obtuse and irresponsible than those found in Europe. They have completely forgotten the prescriptions of sound money and ever lower taxes that fueled their nation’s extraordinary postwar economic expansion. As if in the grips of a death wish, Japan has, since the late 1980s, repeatedly raised taxes, with new levies of all kinds imposed. In the early 1990s the capital gains tax on property was boosted to 90%—and this was before a slew of other property exactions were piled on. To stimulate the tax-strangled economy Japan has gone on spending binges that would make Paul Krugman, Barack Obama and other big-government believers drool with envy. Today Japan’s gross national debt—more than 200% of GDP—vastly exceeds even that of Greece. Nevertheless, Japan is in the process of enacting a new array of tax increases: The top income tax rate, the gasoline tax, the payroll tax, the inheritance tax and the capital gains tax are all slated to go up. The corporate tax rate was cut slightly, but this was more than mitigated by the elimination of numerous deductions. Notes Lewis ominously, “The government is plainly on the road to default.”

Extreme? Unlike Greece, Japan still has immense assets. But the tremors foretelling an economic apocalypse are there: Its once vaunted individual savings rate, for example, has virtually disappeared.
Government debt is now held primarily by banks (which are susceptible to government “suggestions” regarding this matter) and official institutions, another indication of trouble. That’s a phenomenon, by the way, found in both Europe and the U.S.

Fortunately, though the U.S. currently has an antigrowth strategy, ­positive change is coming. Over the past 18 months many congressional Dem­ocrats, for instance, have been willing to cut deals with Republicans on spending restraint, tax simplification and entitlement reforms. But the White House blocked any such agreements. States are enacting fiscal and government workforce changes that would have been politically inconceivable just a couple of years ago. Governor Romney has a modest tax plan that would cut individual tax rates 20% in return for cutting back on certain deductions.

The overlooked but crucial issue of sound money? A small but growing number of Republicans are beginning to grasp just how vital this issue is. So are more and more conservative intellectuals. Despite economists’ ignorant disdain, the matter is coming to the fore.

Romney will win the election, and the GOP will control both the Senate and the House of Representatives. They know their mandate is to get the economy moving again. As American growth accelerates, Europe, Japan and others will imitate our pro-growth prescriptions. Just as they have in the past.