Poland

If the status quo is so good why would we vote out the incumbents?

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Almost everywhere we look, we’re told by the political class how good our lot is. Our blessed Aussie PM told us, “It has never been a better time to be an Australian.” Boosted asset prices, low unemployment and tepid inflation gives the illusion of real wealth for everyone. As an electorate, if all of that were true, why wouldn’t we be going out of our way to make sure the status quo gets voted back in with similar if not greater majorities? As it stands, more and more incumbent parties are hanging on by their finger nails, being forced to create alliances to stay in power rather than stick to the principles their parties were founded on. The irony is that these grand coalitions are formed on the tenets of ignorant ‘un-populism.’

The latest election cycle shows us that a growing number of people aren’t buying mediocrity. They’re sick of incumbent politicians ignoring them. The current crop of leaders seem to think that being less worse than the opposition is a virtue to be proud of. Yet poverty levels continue to rise and wealth is not trickling down to the masses. Even rising state entitlements have a finite life and the electorate knows it. Being married to the government is not seen as a desirable strategy long term. Deficits keep rising and look increasingly hard to pay down.

Searching through the St Louis Fed database, civilian employment under Obama managed to grow 2.5% on pre-crash levels. So the US loaded up on $9 trillion in short term debt to create 4 million net new jobs. That works out at $2.25 million per worker. Hardly an achievement. Yet despite that economic growth has dithered at the lowest post recession rates ever. As much as we might want to celebrate record low unemployment these are not proud statistics. The quality of jobs keeps going down. $8.4 trillion of this federal debt load needs to be refinanced inside 4 years. $12.3 trillion inside 10 years. While politicians can call the average voter stupid, the daily struggles of the average punter shows how out of touch the law makers are. This was the grand mistake made by Clinton. While she hung out with her elite mates at $1,000 plate dinners in Democrat strongholds in LA, NY and Chicago expecting a coronation, Trump hit the little people and had crowds flocking to see him.

While Trump’s trade tariffs seem daft on the face of it, it was done for the forgotten people who voted for him. He is not concerned about the consequences. That’s the point. So much of his platform appears abhorrent but he is the only politician in danger of being raked over coals for keeping his promises. That’s why he was elected. The status quo had failed to deliver over decades. 80% of the population didn’t benefit from the asset bubble post GFC. The 1% took 42% of those gains. The average Joe and Joanne see this. While they might not fully comprehend it they know enough to see their situation is not much better.

Take a look at Trudeau’s India debacle. Apart from the embarrassing wardrobe saga, the bigger problems came when he blamed the Indians for letting a known terrorist attend a state dinner. The Indians, unsurprisingly, were most unhappy at the accusation. Many look to Trudeau as the posterchild of the left, pushing peoplekind. Telling Canadians that he will convert returning ISIS fighters with haiku poetry, podcasts and comparing them to Italian migrants at the end of WW2 is utterly preposterous to his constituents. Telling his veterans they’re asking for too much flies in the face of love of one’s country. No wonder his popularity continues to dive. His speech to the UN – where he rattled off how Canada was ticking all the UN diversity boxes – was only a quarter full. Not even his own liberal mates rallied to show unity in numbers. It was telling that virtue signalling is all about appearing to do good rather than doing it.  Yet the day before Trudeau presented, Trump spoke of America First and the audience was packed. They might have hated every word that dripped from his tongue but they didn’t miss it for the world. It is hard talk. Not carefully prepared politically correct nonsense.

Take the recent European elections. Germany gave Merkel the worst ever performance of the CDU post WW2. The SPD was even worse. The anti-immigrant AfD stormed to 16%. Is it any wonder that when Merkel’s misguided altruism  showed up on Election Day even she finally conceded we have a problem with “no go zones”. Some may wish to look at the Merkel miracle of growth and low unemployment but the public service in Germany has exploded from 9% pre 2008 crash to 16% today. Not private sector growth but public sector.

The Italian election showed over 60% of the vote went to eurosceptic parties. While volatility has always been a feature of Italian politics, this results showed the discontent underbelly of Italy which has seen poverty jump 50% to one third of the population since Lehman collapsed. While M5S said it wouldn’t form a coalition, all bets are off if it tied up with League. There are plenty of overlaps on the party platforms but the M5S would have to insist on the PM role. The EU would go into a tailspin on such news.

Austria voted in a wunderkind who put the right wing anti immigrant FPO in charge of immigration. Holland saw Wilders claw more seats. Nationalist Marine LePen in France doubled the number of seats ever attained by the Front National. Even Macron is changing his spots looking to introduce national service and take a harder line against migrant crime.

Whether the real statistics of migrant crime are wholly accurate or not is beside the point. It is increasingly seen as an election issue and more EU countries have had enough. They feel their lot is getting worse and view forking out billions in aid for people to settle here is pennies out of their pocket. If the stats are as the government sugar coats them to be in terms of the prevailing prosperity surely the citizens would overwhelmingly back them. Sadly the opposite is true meaning politicians aren’t selling their “compassion” effectively. Too many examples of gagging the police and muzzling the press have surfaced.

That is the thing. If the economy was rosy and bullish and more people felt secure there is a likelihood they would look at the immigration debate in a more positive light. All they see now is millions flocking to Europe as poverty is on the rise and the economy is on the back foot at ground zero. European EU-28 GDP hasn’t grown since Q4 2015. Despite a quadrupling of ECB assets net jobs created post GFC numbers 4 million, labour force participation remains below the peak. However we should not forget that Romania and Bulgaria joined in Jan 2007 and Croatia in 2013 which would add (at a 50% employment ratio) c.20mn meaning that employment in the EU on a like for like basis as a whole is down 16mn jobs ceteris paribus. Even if only Croatia was included then net jobs creation in EU-28 would be a paltry 2mn, or a smidgen above 1%. Anemic.

Yet the political class still doesn’t seem to be learning, especially the EU. Poland and Hungary have formed a pact to reject proposed quotas on migrants. The EU has failed to address the most important question. The wishes of the migrants themselves. It is one thing for the EU to appeal to voters as saving asylum seekers from war torn lands (when 80% are economic migrants by the EU’s own numbers), it is another to forcibly send them to countries that flat out don’t want them. Ask for a show of hands of asylum seekers looking to stay in Germany or head off to Hungary to settle and the likelihood is 100:0. Trying to make Hungarians or Poles feel guilty for being incompassionate is a price they’re clearly willing to pay with losing EU membership. Would we take kindly to a neighbor telling us how to arrange our furniture in the living room or sign a petition to prevent us building extensions even though it is not even in their way? Of course not. Still wagging fingers in disapproval is only likely to steel their resolve.

Flip to the Southern Hemisphere and Australian politics is also exposing the sordid state of the swamp. 5 PMs in 10 years. Now the Deputy PM has had to resign to the back bench and in a last ditched effort to claim some sort of moral high ground with the staffer he was having an affair with. He claimed he would still look after her even though a paternity test might show the kid wasn’t his. What a grub and a slap in the face for his partner to imply she may have been promiscuous. Once again the popularity of the incumbent parties in Australia continues to sink to all time lows. The Labor Party looks to have the next election in the bag but even then the popularity of the opposition leader is woefully tiny.

While the world seems to be in this state of blissful tranquility on the outside, we needn’t probe too deep before seeing how bad things continue to be on the inside. The little people may not have any financial fire power but at the ballot box they have an equal opportunity to stuff those that aren’t listening. Once again Italy shows us it wants change. Call it populism if you must but it is truly a reflection of just how bad things really are and how little ammunition to deal with any future crises remains. The little people are raising their voices. Best heed their words. It is the same reason why as zero chance as Trump looks in 2020, don’t bet against another 4 years in the White House. If the Dems hope that celebrities that talk of #METOO and gun control (all the while they attend Oscars semi-naked and collect their millions doing action films full of explosions and automatic weapons fire) will sway them to a return to the swamp they’re sorely mistaken.

Italy votes – will it mimic the referendum?

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Remember the 2016 Italian referendum which was to decide on  whether to grant more power to the incumbent party to accelerate decision making? Well it ended up being a vote on ousting then PM Renzi who put his resignation on the ballot if it failed. The split between the yes/no was largely decided by economic condition. The poorer southern regions were distinctly red while a smattering of wealthy areas voted green (yes).

It is kind of telling that the furthest province in the north (Bolzano/Bozen) had the highest YES vote (63.69%) in the country while the Province of Catania (south-east Sicily) had the highest NO vote at 74.56%. Bolzano/Bozen was diligent with a 67.41% turnout vs 57.41% in Catania. It is a rich/poor divide by the looks of things. If you wish to dig into the details look no further than this site for who voted how.

The last poll showed Beppo Grillo’s eurosceptic M5S party leading with 28%. Berlusconi’s centre right Forza Italia alliance with the anti-immigrant The League is expected to get around 29%. The incumbent PD is looking at around 20%.

Since the collapse of Lehman in 2008, Italy has added 3mn to poverty (now 18mn or 29.7% of the population; EU average is 25%) with the unemployment rate above 11%. Since Merkel’s open door policy 600,000 illegal immigrants have flocked to Italy from Libya.

Italy is the 3rd largest economy in Europe and 30% of corporate debt is held by SMEs who can’t even make enough money to repay the interest. The banks have been slow to write off loans on the basis it will eat up the banks’ dwindling capital. It feels so zombie lending a la Japan in the early 1990s but on an even worse scale.

Monte Dei Paschi De Siena, a bank steeped in 540 years of history has 31% NPLs and its shares are 99.9% below the peak in 2007. Even Portugal and Spain have lower levels of NPLs. The IMF suggested that in southern parts of Italy NPLs for corporates is closer to 50%!

However one views the rising wave of nationalism in Europe, Italy will likely follow the pattern of Austria, the UK, Germany, Holland, Poland, Hungary and France. A growing number of European citizens want to be first in line rather than feel they have an EU directed obligation to bow down to political correctness. How else do we explain the AfD’s surge past the SPD?

If the eurosceptic/anti-immigrant patties get up  we shouldn’t be the least surprised. More Europeans want their own countries to be made great again. The house of cards is crumbling.

Merkel presides over worst outcome since 1949

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Angela Merkel’s CDU/CSU looks to have sealed the largest support but it is her party’s worst showing since 1949. While much of the press is hailing her 4th term one can’t dismiss the rise of the Alternative for Deutschland (AfD) which looks to cement in the third spot with around 14% (c. 6 million votes). In the 2013 election AfD only managed 4.7% (c. 2mn votes) which was below the 5% threshold required to take seats in the Bundestag. Zero seats then, Now looking at 95+.

As CM wrote on Nov 21, 2016,

Think of the coming German elections in 2017 as more like Australia’s recent federal election where Liberal Party PM Malcolm Turnbull scraped home with the protest vote going to smaller parties such as Pauline Hanson’s ultra conservative One Nation Party…Merkel’s power will be greatly cut back as she is forced to pander to the reduced majority and harder line elements the results of recent state elections have borne out clearly.”

While we are already hearing the major parties refusing to form a coalition with it (much like those Dutch parties refusing to team up with Wilders’ Party for Freedom) the message is clear. More voters are sick of the political hand wringing that glosses over issues that concern them. It was the same for Le Pen. Yes, she lost to Macron but she doubled the share of the vote of her Front National party to a record – more than twice as many cared for her platform. Trump’s win. Brexit. The Italian 5 Star Movement. The Italian referendum. The Hungarian referendum. The Dutch election. All showing large shifts toward ‘national’ interests. Why?

It doesn’t matter how far-fetched some might feel the views of people who are voting for ‘nationalist’ platforms may be, the reality is that the counter arguments and actions taken by the current crop of the apologist political class isn’t cutting through. The only way many can express their frustration is at the ballot box. Hence we get Merkel’s worst showing. Yet when political parties say they ‘refuse’ to partner with it, how can they realistically alienate a party that represents 14% of the country? The mainstream media pillorying the supporters of right wing parties are part of the problem. They are made to feel ashamed for holding legitimate  concerns so all that happens is they get pushed underground and resurface at election time. This is why opinion polls have become largely meaningless.

In Merkel’s case what did she expect when she tried to gag the media and police in Cologne on New Year’s Day to cover her gross misguided altruism? To then support the Mayor of Cologne’s suggestion that German women dress more appropriately so they won’t be pestered spoke to many as such a limp wristed response to common decency. Germans are fair minded people but they cannot be expected to sacrifice hard earned freedoms for some who treat their generosity with utter contempt. Hearts and minds can’t be one by political correctness which seeks to segregate swimming pools and encourage citizens to keep an arms distance from certain groups to avoid unsolicited contact. No wonder the hard talking AfD has taken advantage of this weakness.

Before the trolls scream “racist, Nazi or bigot” we must ask ourselves why these large shifts? Put simply, more people are wanting action over problems they are not being addressed by the political class.

In Germany, political violence has been at record highs. The domestic intelligence agency, the Verfassungsschutz (BfV), reported  in Germany’s 2016 Report on the Protection of the Constitution, the number of left-wing extremists climbed last year, rising to 28,500 — the highest figure since 2012. It said the number of right-wing extremists was 22,471, about one-quarter of whom were neo-Nazis.

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Surely such demonstrations pointed squarely at politicians failing to be open and frank about issues. Talking about truck drivers ramming Christmas markets or shooting up Munich shopping malls as isolated events doesn’t fool anyone. Perhaps the most disgraceful cover up was the camera footage of three Bulgarian migrant thugs who kicked an innocent German female down some subway stairs where she broke limbs. The man who released the video as evidence of the lack of action taken by authorities was arrested for breaching privacy laws. It is like charging a home owner for knocking out a thief trying to break and enter.

Chalk this up as another loss for the political establishment.

 

 

Poland would happily trade in its EU membership to save its culture

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An IBRiS poll conducted for the liberal and pro-EU weekly Polityka was published on July 5. The two questions posed to 1,000 people polled was essentially to gauge loyalty to the EU or Poland. Poland would seemingly be happy to trade in EU membership than sell out their culture. This is not a debate about the rights and wrongs of taking in asylum seekers rather to point out what is happening on the ground.

Q1: “Should Poland refuse to accept refugees from Muslim countries even if this should lead to the loss of European funds?”
– YES: 56.5%
– NO: 40.4%

Q2: “Should Poland refuse to take in refugees from Muslim countries even if this should lead to the obligation to leave the European Union?”
– YES: 51.2%
– NO: 37.6%

This opposition to the relocation of asylum seekers arriving in Greece and Italy is reflected in the popularity of the Polish conservative PiS party. The PiS hit 41% in a June IPSOS poll for the first time (against Donald Tusk’s Liberal party PO at 26%). The poll was conducted at the same time the European Commission had announced the launch of sanctions against Poland, Czech Republic and Hungary for their refusal to accept immigrant relocation quotas.

It was only last week that Italy threatened to issue 200,000 refugees with EU travel documents that would legalize their movement around Europe (i.e. encourage their departures from Italy to the desired destination of Germany).

In response to Italy’s threat, Austria is now looking to shut its border with Italy at the Brenner Pass. Bild newspaper has said that Vienna was ready to close the Brenner Pass within a day if migrant arrivals increased. Tensions are already high. Austria has threatened to send armoured vehicles and 750 soldiers to stop migrants crossing.

Whether we like it or not, for all of the altruism in the world, it seems that a growing number of citizens want their governments to prioritize them first. Failure to do so is being typified by what is happening in Greece.

According to the annual survey by the firm Adecco titled “Employability in Greece,” the brain drain phenomenon has been increasing over the last three years. In 2005 only about 11% of unemployed respondents said that they were actively looking for a job abroad. This figure increased to 28% in 2016 and reached 33% so far this year.

The responses show that the unemployed have different reasons to seek work abroad. Whereas in 2005, the main reason was the prospect of a better wage, in 2016 and 2017 the main reason given were better career opportunities abroad. Greeks are giving up on Greece. EU fiscal thuggery is leaving a public system (especially health) under so much strain that it is buckling. 36% of Greeks live below the poverty line. That means many can’t access affordable healthcare because it is generally provided by corporates and when you lose a job you lose the healthcare. This means many are forced to use A&E of major hospitals which are now overcrowded and understaffed as more doctors are leaving to seek better fortune for their services.

If that wasn’t enough, mothers who had given birth were being restricted from taking their new-borns home if they couldn’t pay the fees. While the government has banned this practice they have introduced new laws to allow the seizure of assets (e.g. homes) if debts are not settled.

Forced refugee quotas on countries that plainly don’t want them is a bad strategy. Economic conditions are clearly not in the EU’s favour with poverty and youth unemployment at record high levels. For refugees, most do not want resettlement in either economically weak zones or those that are openly hostile toward them. That is completely understandable. For the citizens of member states to be threatened with sanction or penalty for failing to comply is the wrong way to go. By the EU’s own statistics bureau, 80% of asylum seekers are ‘economic’, not fleeing war zones. It is understandable that citizens become concerned when public services that are already under strain become overburdened.

Some can scream at these people for being bigoted, racist or intolerant till the cows come home but ignoring their views, much less ridiculing them has the opposite effect of winning hearts and minds. As a grandchild of refugees, helping those in dire need is basic human decency. One can be sure that many in real ‘need’ will give back to those that have given them a second chance. Those who have come to help themselves at the expense of others who have worked hard to attain it should hardly be surprised when they are not given the same level of sympathy.

What we are seeing in Poland, Italy, Greece and Austria is ‘actions’ over ‘words’. Unless concerns are addressed by political leaders, altruistic lip service will be ignored and sadly people will increasingly take the law into their own hands.

Poles apart

Once again how the social media feeds lit up with the supposed snubbing of President Trump by the Polish First Lady. If people took five seconds to come out of the sandpit and  objectively analyze her actions they’d see without deliberate video editing she clearly shook his hand immediately after she shook FLOTUS’s hand. It is pretty easy to work out why so many click bait media organizations are floundering. There is no intelligence or effort to be objective. Sadly one is forced to doubt almost every meme of this kind. It makes tabloids look like professorial theses by comparison. Even the Polish PM came out tweeting it was “FAKE NEWS”

Earlier in the week media were trying to claim he got lost on the way to his limousine when he alighted Air Force 1 as if to claim he was suffering from a mental disease. No doubt trying to add some credibility to the Democrats trying to seek his removal for a lack of mental faculty.

He is without doubt unconventional, often unstatesmanlike, at times shows a lack grace/eloquence and narcissistic (his round table where cabinet members professed their love for him was pretty nauseating) but reading his speech (even if composed by his speech writer – which president doesn’t?) in Warsaw, Trump spoke of what many of today’s apologist leaders refuse to. He believes in the idea that it is totally acceptable to defend your own values and culture. That people shouldn’t be pilloried for feeling patriotic. This week we’ve seen Trudeau offer a state apology and $10.5mn compo payment to a convicted terrorist.  Several months ago Canadian Bill M-103 was passed in such a way that free speech is gagged toward a specific minority. Australia tinkers at the edges of the draconian 18C and still bothers to invest in the AHRC which has shown itself to be an absolute waste of time, resources and worst of all a wrecker of the reputations of innocents. Germany arrested a good samaratin that released a video showing migrant violence toward an innocent victim on grounds of breaching privacy laws and the women of Cologne were advised to wear less revealing clothing to avoid being pestered. We could go on for ages. Is this defending culture? Thinking we gain acceptance by denying our own identity? I applaud Trump for making valid points about pride in one’s nation, something the gritty Poles know all too well.

There are many things not to like superficially about POTUS but when it comes to asking harsh questions about a fair share of funding for NATO or the UN, citing legitimate reasons for ditching the Paris Climate Accord or poking China to start dealing with its geopolitical chess piece in North Korea, he is speaking truths his predecessor would never broach. Sure he has much work to do at home but the world can’t help but notice the new sheriff in town on the global stage and boy do we need strength in this department after eight hollow years where countries like China and Russia ran amuck.

Yet when all is said and told, the mainstream media remains too busy trying to create stories/scandals with concocted outcomes by editing out the facts to create ‘ gotcha’ scoops which achieves their goals of personal hatred. Fake news? That term is getting overused. The fake part may be right but the news part isn’t.

Trump’s tax cuts – how much does corporate America pay? You’ll be surprised by the necessary evil

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How can Trump cut taxes to 15%? For those greedy corporates! Interestingly when one deep dives into the data two things emerge. One is that in 2016 net corporate tax receipts fell to around $444bn. Second US corporate taxes have slumped from 6% of GDP in the 1960s to around 2.4% of GDP today. Income tax and payroll taxes make up around 65% of the tax that fills the Treasury Department’s coffers. Of the $2.2 trillion that the government gets through squeezing us, they splurge around $3.6 trillion (see below).  Since the tech bubble collapse, the budget deficit has becoming a gaping chasm. It is a massive hole to fill.

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Naturally people scream that giving corporates massive tax breaks is obscene. What they tend to forget is that US corporations hide an obscene amount of taxable revenue (some estimate around $500bn p.a.) overseas. Apple’s €13bn tax bill fight in the EU should spring to mind. In any event we should look at corporate tax in the US that brings in around $444bn p.a. Slashing tax rates does not automatically imply that the $444bn will fall to $200bn. Looking at corporate profitability before tax one wonders are businesses really struggling? Pre-tax profits are hovering at around $2.2 trillion.

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There is a whiff of Poland about Trump’s plan. Poland faced similar corporate tax avoidance issues but in 2004 introduced sensible taxation reform which cured the problem. To lure tax avoiders/evaders from their lairs, Polish athorities introduced a flat business tax (19%) and its impacts were so favourable that the government saw a 50% increase in income reported by those corporates in higher tax brackets before the change and a 50% increase in reported income from individuals that fell into upper income tax brackets. In 2009 income tax rates at the top were slashed from 40% to 32% Despite this income tax receipts jumped 17%. Since 2004 tax receipts soared 56.4%. It clearly proved that lowering taxes created much higher tax compliance. There was a psychological factor at play – the cut ‘encouraged’ honesty.

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When breaking down the tax take by the Polish government we see that all levels of tax collection rose. Consumption, corporate, personal income and other tax categories jumped  45% or more.

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So there is method to the madness. Talks of a $2 trillion deficit that will need to be funded if it goes ahead is not based on reasoned economics if the Polish example is anything to go by. Besides we live in such a debt-fueled world now that central banks will just print the gap if others won’t step in and buy it. So this is a risk Trump sees worth taking. Lower taxes, encourage US corporates to repatriate income abroad, create jobs and get small business (50% of employment in America) to expand and create a virtuous circle. Whether he can pass these taxes through remains to be seen. What we can say is that corporate taxes are a measly % of GDP and total tax take compared to income and payroll taxes. However if US corporates aren’t encouraged to build at home then it is harder to squeeze the workforce for the bulk of the revenue pie. Pretty simple really and there is actually very little to lose. So quit the angry ‘evil corporates’ tag line and change it to ‘necessary evil.’

Why Japan should follow Poland’s tax code

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In Japan, 97% of the income tax burden is borne by the top 47% of earners. Over two-thirds of Japanese SMEs (corporations capitalised under ¥100mn) pay no tax. While the government has progressively eased the corporate tax rate from north of 50% in the 1990s to just over 40% during most of the 2000s to under 30% by 2018 companies have avoided chipping in to the national coffers. Fig.1 shows clearly that despite corporate tax rates coming down, the impact on the number of corporates reporting losses to the tax office remains largely unchanged.

Poland faced similar issues but in 2004 introduced sensible taxation reform which lured long term tax avoiders/evaders from their lairs. Authorities introduced a flat business tax (19%) and its impacts were so favourable that the government saw a 50% increase in income reported by those corporates in higher tax brackets before the change and a 50% increase in reported income from individuals that fell into upper income tax brackets. In 2009 income tax rates at the top were slashed from 40% from 32% Despite this income tax receipts jumped 17%. Since 2004 tax receipts soared 56.4%. It clearly proved that lowering taxes created much higher tax compliance. There was a psychological factor at play – the cut ‘encouraged’ honesty.

Japan on the other hand continues to drip feed corporate tax cuts at such slow rates that there is little perceivable reason to change behaviour. Instead of burying the dwindling number of diligent tax payers ever more Japan must reform its tax code. We estimate a flat tax with similar outcomes to what Poland experienced would shrink the annual budget deficit by two thirds.

Poland’s population has similar dynamics to Japan, albeit a few decades behind. Population numbers have stagnated at around 38 million in the last decade and the Central Statistical Office of Poland (CSOP) is forecasting by 2050 that it falls to around 34 million. Poland’s 65+ year old demographic will be one-third the total population versus 2/5ths in Japan by 2050.

Naturally Japan’s income tax payer pool is shrinking as the working population declines. None-the-less if Japanese authorities stick to orthodox tax policies and try to squeeze more revenue from wherever it can by raising taxes it will only discourage growth and stagnate the economy further.

Put simply Japan must put its fortunes into the hands of its citizens. Note I did not say ‘back’ in the hands. The government has rarely extended the private sector a free hand but the statistics speak for themselves. Fewer Japanese are paying income tax and even fewer corporates are even bothering to report profit so they are not stupid. The government must come to the conclusion that lowering tax rates considerably will be the only antidote.

If taxes came into line with Singapore or Hong Kong it would make Japan a far more desirable place for multinationals to establish headquarters in the region. This would kill three birds. It would stimulate much needed skilled foreign migration, drive property market transactions and provide employment which all leads to more tax dollars. As capital attracts capital were Japan to reform in such a major way, Japan’s equity markets would react to this new-found sense of purpose.

While we can applaud the direction of corporate tax in Japan, effective tax rates when a company adds local taxes, municipal taxes, prefectural taxes, enterprise taxes becomes closer to 40%, more than double its Asian rivals. Proposals to trim large sized national corporate tax rates from 25.5% to 23.9% have been agreed. SMEs earning less than ¥8mn are subject to a 19% tax rate but will stay at 15% until April 1st, 2017. We don’t wish to trawl into the intricacies of local tax law but Japan needs a change that “jolts” people and corporations to action which is not a one-way street. We run through the psychology of taxes in a later section.

For Personal Income Tax (PIT) in Japan, rates are effectively 50% in the top bracket when local taxes and the 2.1% special income tax for reconstruction (i.e. to pay for the 2011 Great East Japan Disaster) which ends in 2037 are added on top.  None-the-less Japan’s income tax burden is being increasingly borne by the wealthy. In 2012, half of total earners paid no direct tax.

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Japan’s national deficit struggles to close. Expenditures, post the bubble period have comfortably exceeded tax revenue.

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In 2015, the consumption tax comprised the largest component of filling the Japanese government coffers. Personal income tax has also declined from a peak of 40% toward 30% of the total tax take. In 2015 corporations made up around 20% of total tax take. While higher than it was in 2009, it is still well below the peak of 2008 (38%). Corporate taxes are below the level of 2001.

One must also question the collection costs for the tax authorities. As a business owner in Japan the nature of tax payments is cumbersome. After registering the company with the Ministry of Justice, I need to register with the Tokyo tax office, then lodge documentation for the Minato ward and fill in half a dozen forms with carbon paper triplicates and put my registered seal (company chop) in 20 places which no doubt gets filed in 5 different departments.

We do not have to look very far to see the shortcomings of using paper records when digital could boost efficiency, arguably what the introduction of My Number seeks to address. In 2010, Japanese authorities stumbled over the fact that many people were collecting the pensions of their relatives that died decades ago. They discovered 77,000 people aged over 120 listed as still alive and 884 aged over 150. One woman that was born in 1837 was still listed as living, meaning she’d be turning 179 this year. Another retiree collected ¥50mn in pensions from her parents that died in the 1960s.

Japan’s small-medium enterprises (SMEs) are the backbone of employment, comprising 70% of the labour force and 99% of all corporations. While headline corporate tax rates are expected to drop to 29.97% in 2016 and 29.74% in 2018 from 32.1%, we need to look between the lines. Corporate tax rate changes have had negligible impacts on tax intake. Economic conditions have a bigger bearing on tax take than the tax rate changes.

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Tax losses could be carried forward 9 years and offset up to 80% of each year’s taxable income. To slow down companies using this method, tax authorities have reduced this to 65% for fiscal years between April 1st, 2015 and March 31st 2017 and 50% thereafter.

Fig.51 shows that 98% of companies in Japan pay only 24% of the corporate tax intake. That’s right – 2.5mn corporations pay less than one-quarter of the tax burden.

Breaking this down by industry we can see clearly that the tax burden is shared pretty unevenly. Consolidated corporations make up 0.1% of all companies in Japan yet paid 12.8% of the tax burden in FY2014. The construction industry made up almost 16% of corporations by number but only paid 5.3% in tax. Of course this is skewed by the revenue base of each industry, Fig. 55.

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Broken down by the type of industry we can see that 80% of restaurants, bars and hotels report no tax payment. While running, successful restaurants poses a challenge one could argue that high levels of cash transactions would potentially lead to grey economic practices.

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What is clear is that current tax policy is having little effect on behaviour. 70% paying no tax over many decades despite the drip feed cuts requires more heavy handed responses.

The Polish experience with Flat Tax – this is how a ‘jolt’ works

Poland had long been suffering from a lack of tax receipts no thanks to high levels of corporate and personal income tax rates which pushed more money into the ‘grey economy’. Poland took the bold step by surmising if they cut tax rates by a large enough amount (cut to a flat rate of 19% from the progressive 19%, 30% & 40% brackets) businesses would stop bothering to go out of their way to dodge the tax man, Fig. 57. The effects were profound.

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Personal (PIT) and Corporate income tax (CIT) receipts behaved in the following way. Since 2004, PIT receipts jumped 69% and CIT by 45%. The lift in economic activity driven by the changes drove consumption tax intake by over 55%. Over the same period, Japan’s PIT rose a measly 5%, CIT fell 17.2% and consumption tax receipts were flat, Fig. 58.

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While Poland (which still uses the zloty) benefitted from EU accession since 2004, tax reforms were a key factor in driving positive tax collections. Although progressive tax rates remained in force for personal income tax, the Polish made provisions that allowed individuals of these businesses, at their request, to pay a 19% flat tax which carried certain restrictions on other benefits. Poland has also made it clear that taxpayers that do not disclose sources of revenue and income will be taxed 75%. Transparency is clear. Japan should adopt a similar system to capture a wider share.

Unemployment rates in Poland plummeted in 2004 from around 20% to around 6.5% before the GFC and in recent years trended back to those lows.

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If Japan introduced a 19% flat tax (including all other regional, local and other taxes) and corporates reported a 50% higher income (those companies incorporated below ¥1bn) and 50% of the non-tax paying corporates paid ¥1.5mn in tax then Japan would collect around ¥12.5 trillion yen (+¥2.4bn) based on FY2013 tax take. If we analyse the general recurring margins of around 4.3% for the majority of smaller companies, any efficiency uptake through competition by 1% would see this number at around ¥15 trillion.

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Poland offers far better longer term tax solutions to Japan. Burying Japanese in higher taxes is the wrong way. While headline rates are championed as being cut, a wealth of stealthy local and other taxes take back what was supposed to be gained. It needs to stoke the entrepreneurial spirit because frankly there is no other alternative and nationalising the debt via the BoJ will ultimately backfire. The mass ETF buying by the BoJ which was supposed to push equities to levels which would encourage Mrs Watanabe to spend her winnings in Mitsukoshi have been shoved between the mattress. Japan’s authorities inspire very little in the way of new methods of reversing decades of stagnation. Power has to be put back in the hands of the people as public policy has failed and will continue to fail. Without swift action the depopulation and pressure on the prefectures will exacerbate.