Why Different Remedies for Japan and Russia?

Why Different Remedies for Japan and Russia?

Why Different Remedies for Japan and Russia?

Answers to your questions about the news.
July 14 1998 8:57 PM

Why Different Remedies for Japan and Russia?

Japan and Russia both face fiscal crises. Tuesday's Today's Papers notes that everybody is advising Japan that the cure is to cut taxes and advising Russia that the cure is to raise taxes. Huh?

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Japan is being encouraged to decrease tax rates so Japanese citizens will have higher disposable incomes and therefore spend more money. The logic is Keynesian--stimulate the economy by pumping more money through it.

Russia is being encouraged not to raise tax rates but to collect taxes that it is owed. Russian citizens and firms are notorious tax cheats and the government (unlike Japan's) runs a huge deficit. But in terms of economic impact, aren't raising taxes and raising tax collection rates basically the same thing? Perhaps. Reformed tax collection will reduce disposable income, thereby tending to slow down the economy. But financial gurus are more worried about the government's budget deficit. Giving foreign investors confidence in Russia's future will do more to stimulate the economy than the fiscal drag of added taxes will do to slow it down. And a government that can enforce its tax laws and raise enough revenue to cover its expenses is thought to be the most crucial confidence-inspiring development.