Toward Meaningful Tax Reform in Japan

American economists have been giving policy advice to Japan since the Shoup tax reform commission of 1949. Even then, the advice was not always helpful.

U.S. government officials now tell Japan that larger budget deficits are the key to boosting economic growth and stock prices. Yet the same officials claim that the U.S. economy and stock market have benefitted from much smaller budget deficits.

When looking at tax policy as a separate policy tool, we must get beyond Keynesian "macroeconomics," and the related bad habit of ascribing magical properties to government borrowing. A few years ago, prominent macroeconomists in the U.S. and Japan were absolutely confident that American budget deficits had pushed interest rates and the dollar up, causing trade deficits. Today, much larger budget deficits in Japan are associated with the lowest interest rates in world history, a falling yen, and rising trade surpluses.