Martin Wolf: tax (Japanese) excess corporate savings mountain.

Martin Wolf has an interesting article in the Financial Times entitled Japan’s unfinished policy revolution, with a subtitle Tokyo’s economic system is a machine for generating high private savings.

The article starts by discussing an already much-discussed topic: Japan's recent monetary policy revolution: a massive does of what it calls "quantitative and qualitative easing." It argues that such measures can only work in the short run.

"The underlying obstacle is structural: it lies in what is now a dysfunctional corporate sector. . . . Japan’s private savings – almost entirely generated by the corporate sector – are far too high in relation to plausible investment opportunities"

Japanese companies are sitting on oceans of idle cash, in a mature economy with a demographic skew towards the elderly who do not use these savings productively. The counterpart of huge private savings, in a country where neither households nor foreigners are in much of a position to absorb the slack, is large government deficits.

What is the answer? Very simple.

"The worst possible tax rise is the one on consumption now planned, since Japan consumes too little. Tax corporate savings, instead."

It's an irrefutable argument. This would not only shift resources away from a sector (corporations) where it is sitting idle to a sector (government) where it could be put quickly to good use, but it would "deprive companies of the cash flow cushion that has featherbedded inefficiency." This is in line with what we've been saying for years: tax avoidance provides subsidies to multinational corporations that featherbed economic inefficiency. More specifically, Wolf advocates

"a huge reduction in depreciation allowances; a punitive tax on retained earnings, possibly combined with incentives for higher investment."

We would only remark that Japan is merely a more extreme version of what is happening in many economies today: corporations in the UK and the US are sitting on seas of idle cash too.

Tax corporate savings mountains.

And that's an agenda that currently has relevance way beyond Japan's shores.

And yet governments seem to be pushing in exactly the opposite direction.

We have been talking about this for some time. This LSE blog we did recently explores the issue further.