Japan Just Showed Why U.S. Democrats Will Be Doomed If They Try To Raise Taxes
Vincent Fernando, CFA
Jul. 11, 2010
Japan’s incumbent political party suffered a massive defeat at the polls this Sunday, as upper house elections left the Democratic Party of Japan with just 47 seats.
The result was far short of prime minister Naoto Kan’s 54-seat goal, though the DPJ should still retain power due to their majority in the lower house.
So what’s being blamed for their defeat this Sunday? Trying to raise taxes:
“Kan lost the election calling for a sales tax hike,” said Koichi Haji, chief economist at NLI Research Institute.
“That is a huge setback for fiscal reform. Now the question is whether Kan can stay in power or not.”
The Democrats swept to power last year promising to cut waste and focus spending on consumers to boost growth. Public backing nosedived due to indecisive leadership and while government ratings rose when Kan took over last month, they slipped after he floated a rise in the 5 percent sales tax to help rein in debt.
A poor election outcome leaves Kan vulnerable to a challenge from party powerbroker Ichiro Ozawa — a critic of his sales tax hike proposal — ahead of a September party leadership vote. Few, though, would expect Kan to go without a fight.
Without a coalition majority, the Democrats will need to seek new allies, hampering their push for fiscal reform including a possible sales tax hike.
This is an example of how voters can initially decry budget deficits, but then punish the party who tries to raise taxes as a solution, even the party they once showed overwhelming support for. Democrats pondering whether or not to extend the Bush tax cuts should take note.