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Japan Agrees to Double Consumption Tax


JEast
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Austerity?  Reducing Debt?  How does this play out for the end is near for the yen 'Bass Play?'  Or is it just more deflation?  Questions, and more Questions.

 

http://www.nytimes.com/2012/06/16/business/global/japan-reaches-tax-deal-that-could-help-shrink-debt.html

 

Also with the agreement, they have decided to start-up some of their nuclear plants as summer is approaching.

 

 

Cheers

JEast

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Wow!  They are increasing their consumption tax from 5% to 10%?  I hope that the republicans and democrats are taking careful notes, as a similarly sized measure might help in to fill the budget black hole the U.S.

 

Here the consumption tax is 15%. I wish it was just 10%...

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How about just ending (or capping) mortgage tax deductability?  Or removing all/many of the loopholes.

 

I don't understand argument for ending mortgage tax deductability.  Everyone talks about it with the assumption that it somehow contributes to inflating housing prices.

 

I guess there are a few basic things I think that most people (who argue for ending the deduction) haven't considered:

 

1.  Ending this deduction without ending the deduction for corporations for interest on debt will not work.  You can't have one without the other.  If you try to end mortgage deductions without ending corporate interest deductions, everyone will just do the equivalent of companies doing sale-leasebacks (sell their homes to corporations that can take advantage of interest deduction, and then rent it back.  I don't think most people have considered this.

2.  If you end interest deductability (for both corporations and people), this is likely to affect housing prices, and it will also cause the stock market to decline significantly (WACCs for every indebted company increase).  What politician wants this on their hand?

3.  If you end deductability of interest expense, it only logically makes sense to end the taxation of interest income.  Most interest in the country currently is tax-neutral; one party gets a deduction and the other party pays income tax.  There are many parts of the tax code that a similarly neutral; you pay life insurance premiums with after-tax dollars, but your beneficiaries will not owe tax on the death benefit.  The capital markets have become accustomed to this neutrality for interest, and it naturally makes logical sense. 

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How about just ending (or capping) mortgage tax deductability?  Or removing all/many of the loopholes.

 

I don't understand argument for ending mortgage tax deductability.  Everyone talks about it with the assumption that it somehow contributes to inflating housing prices.

 

I guess there are a few basic things I think that most people (who argue for ending the deduction) haven't considered:

 

1.  Ending this deduction without ending the deduction for corporations for interest on debt will not work.  You can't have one without the other.  If you try to end mortgage deductions without ending corporate interest deductions, everyone will just do the equivalent of companies doing sale-leasebacks (sell their homes to corporations that can take advantage of interest deduction, and then rent it back.  I don't think most people have considered this.

 

You just have to include a tax avoidance clause to disallow the credit in related party transactions.

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How about just ending (or capping) mortgage tax deductability?  Or removing all/many of the loopholes.

 

I don't understand argument for ending mortgage tax deductability.  Everyone talks about it with the assumption that it somehow contributes to inflating housing prices.

 

I guess there are a few basic things I think that most people (who argue for ending the deduction) haven't considered:

 

1.  Ending this deduction without ending the deduction for corporations for interest on debt will not work.  You can't have one without the other.  If you try to end mortgage deductions without ending corporate interest deductions, everyone will just do the equivalent of companies doing sale-leasebacks (sell their homes to corporations that can take advantage of interest deduction, and then rent it back.  I don't think most people have considered this.

 

You just have to include a tax avoidance clause to disallow the credit in related party transactions.

 

Even without related party transactions...there is a degree of efficiency to the market economy.  If you allow businesses to deduct interest but not individuals, businesses will have a cheaper cost to owning real estate, and through competition of landlords, this will be passed on to tenants in the form of rent.  In other words, rents are lower than they would otherwise be if landlords did not have the luxury of interest deduction. 

 

By allowing businesses the ability to deduct and not individuals, over time individuals will find it is cheaper to rent than buy, and home ownership levels will decline severely.  Any logical individual who still wants exposure to real estate, would rent his own home (because rents would be implicitly reduced by mortgage deductability for landlords) and buy a separate rental property.

 

You don't need related party transactions for the "invisible" hand of the market economy to work.  I stand by my claim that if the government wants to effectively remove the deductability of interest, they will need to do it for both businesses and individuals, and this will not happen as it will cause large scale declines in asset prices. 

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I think both of these things show that the Japanese are willing to do both the best thing and the right thing.  The tax isn't ideal, but they need to get the financial house in order.

 

I always love when people trot out the Japan is dead lines and it involves the linear reasoning if A happens then B then C then D then implosion.  First most things never play out in a linear fashion as "experts" expect, and second Japan is one of the most developed countries in the world.  There are a lot of things they can do to fix their fiscal problems, they haven't even begun to exhaust their options.  And the demographics?  Well couples can be encouraged to have more kids.  The Japanese are resilient and when pushed to the wall I think they'll do what it takes. 

 

Just my thoughts, of course I'm also invested over there, so I'm putting my money where my mouth is.

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Even without related party transactions...there is a degree of efficiency to the market economy.  If you allow businesses to deduct interest but not individuals, businesses will have a cheaper cost to owning real estate, and through competition of landlords, this will be passed on to tenants in the form of rent.  In other words, rents are lower than they would otherwise be if landlords did not have the luxury of interest deduction. 

 

By allowing businesses the ability to deduct and not individuals, over time individuals will find it is cheaper to rent than buy, and home ownership levels will decline severely.  Any logical individual who still wants exposure to real estate, would rent his own home (because rents would be implicitly reduced by mortgage deductability for landlords) and buy a separate rental property.

 

You don't need related party transactions for the "invisible" hand of the market economy to work.  I stand by my claim that if the government wants to effectively remove the deductability of interest, they will need to do it for both businesses and individuals, and this will not happen as it will cause large scale declines in asset prices.

 

Explain the Canadian case then. 

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Explain the Canadian case then.

 

I'm from the states, so I'm not an expert on this, but my understanding is (1) asset swaps are a legal way in canada to achieve mortgage interest deductability and (2) Canadian culture is such that debt is used less (and therefore deductability is less influential), as the aggregate homeowners' mortgage balances are about half that of their US counterparts, in terms of LTV.

 

 

 

...and, btw, I am not a foe of your proposition to "end loopholes" in general.  I would be a huge fan of a much simpler tax code.  A consumption-based alternative would be the best in my mind, a flat income tax a close second, or even a progressive income tax with no deductions a better option as well.  However, under the current system (1) you cant effectively get rid of interest deductability without also banning it for corporations, and (2) In order to keep the tax code consistent/symmetric as it is in other areas (such as my life insurance example), you would also need to remove interest income taxation. 

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If you want interest deduction on a home loan in Canada you have to invest the proceeds from the loan into investments that can earn more than just capital gains: some dividends or interest. So that is investing the equity in your home via a loan. It is an option available to and used by few.

 

Regarding the appetite for debt by individuals in the U.S., we have seen how it turned out and I expect that this will normalize to much less in the future. Both borrowers and lenders will be more careful going forward.

 

I think that your are assuming too much sophistication by home market participants. The deduction in the U.S. is a nice incentive, but even if you remove it (not saying that they should), people would still buy homes in very similar amount. They just want it even if leasing could end up sometimes cheaper. Moreover, for a great majority of people, it is about the only thing of value that they will have upon retirement excluding pensions and 401K. It forces them to pay for something valuable while if renting they would blow the extra money on expenses and gadgets.

 

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