I don't want to try anyone's patience if people think the thread has been played out, but Nobuhiro Hiwatari posed some direct questions posed to me and I feel it's only proper to respond.

Why did Kan make the tax hike the centerpiece of his [2010] campaign? Was he, as Noda, "willing to sacrifice his own career and the DPJ's electoral chances"?

RK:

I think Kan had a couple reasons. One was policy. When he became Finannce Minister in early 2010, he said part of his job was to convince voters of the need for a tax hike. Then, in May, he went to an OECD ministerial meeting in Paris, where he got freaked out by the emerging Greek crisis. Upon returning to Tokyo, he received a briefing about a Greek scenario for Japan, complete with charts. I've never been able to find out who gave him the briefing, but DPJers in some other ministries were complaining that Kan was too impressed by MOF bureaucrats, who seemed to him so much smarter and less corrupt than the Health Ministry bureaucrats he'd dealt with before. Kan started talking publicly about the need to move quickly on a tax hike to avoid a Greek Tragedy in Japan, where a spike in interest rates would wreak havoc. For what it's worth, the ten-year Japan govenrment bond interest rates during June 2010 was 1.3%. Today, it's 0.8%.

Secondly, as I indicated in my August 30 response to Greg Noble, Kan grossly misread the mood of the public, and continued to misread it even after his poll readings started plunging. He vainly tried to fuzz up his tax stance, but that just made him look weasely. I don't think he was willing to fall on his sword like Noda and he, like most pollsters, was surprised by the severity of the voter repudiation.

NH:

Also, the LDP's 2010 Manifesto said they will "reform the tax system including a consumption tax increase"
(p.8 headeline). However, they won!

RK:

LDP leaders had long said it would raise the tax at some point. Many said it needed to cut spending first, e.g. Koizumi. Unlike Kan, the LDP did not propose an immediate rise during the 2010 campaign, whereas Kan initially spoke of raising the tax by April 2012.

Beside the LDP did not win, the DPJ lost. This is not just semantics. In the PR segement, both parties lost votes and seats to the anti-tax Your Party, but Your Party took more votes from the DPJ than from the LDP (DPJ down by 4.8 million from 2007; LDP down by 2.4 million). So that helped the LDP relative to the DPJ.
The LDP's share of the PR vote declined to a mere 24% of the vote, down from 28% in 2007, 30% in 2004 and 39% in 2001 (see Figure 1). It won only 12 PR seats, down from 14 in 2007, 15 in 2004, and 20 in 2001. In the district seat segment, all of the LDP's gains came from
29 mostly-rural single-district seats, which have only 30% of the population, but 40% of the district seats.
The DPJ had taken a lot of these seats from the LDP in 2007--when Ozawa dropped the tax hike by the way--and then lost them back in 2010. The LDP's gain of 16 seats in those 29 districts accounted for the entirety of its seat improvement. In the rest of the country, with 70% of the popuation, it did not gain a single seat.

NH:

Firstly, DPJ no longer needs to fight the next election on a tax hike platform. So Noda has put himself in a much better position than Kan in facing the election.
RK:

Do you really think the voters will have forgotten the tax hike by then? Do you think the third force parties will let the voters forget? Do you know of any DPJ electoral strategists who are telling Noda that he's in a better position than Kan?

NH:

The parties destined to win big are not the anti-tax hike parties. They are LDP and the Osaka-Hashimoto group.

RK:

Hashimoto is in the habit of issuing vague pronouncements on certain issues and harder positions on others. As far as I can tell, all he has said is that all revenue from the consumption tax should be allocated to local govenments (as opposed to DPJ stance that it is for social security), but he has opposed Noda's tax hike and the LDP-Komeito-DPJ pact on this hike. Correct me if this has changed. In any case, we'll see how he campaigns. It would be very interesting to see really detailed questioning of Hashimoto voters on why they voted for his party.

NH:

Any major party leader who wants to build up a reputation of being a responsible and a competent manager of the economy will sound more credible if the person speaks the "truth." Otherwise, why did Walter Mondale explicitly say he will raise taxes? Why is Paul Ryan calling for sacrifice?
RK:

How well did that work out for Mondale?

I know of only one case in the OECD--one election in Australia--where a party campaigned on a tax hike and won. There are other cases where candidates opposed tax hikes, won, and then raised taxes afterwards, including Ronald Reagan (who therefore could not win the Republican nomination today).

As for Paul Ryan, most of the sacrifice is borne by the poor, e.g. Medicaid and food stamps, and by some of the elderly (Medicare). The Romney-Ryan plan calls for another round of big tax cuts to be financed by unnamed closing of tax loopholes. The campaign has given strict instructions not to name any. Thus, when reporters ask Romney or his advisers if they will end mortgage interest deduction, they won't say. Will they end tax subsidies for oil and gas industry? They won't say.
Etc. Etc. We'll see how well the Ryan plan for Medicare plays in the must-have state of Florida. The Obama campaign is delighted that Romney chose Ryan.

NH:

Identifying the cause of electoral change is difficult

RK:

I agree, but it doesn't mean that analysts shouldn't try. It's also why politicians (at least in some
countries) hire high-priced consultants to tell them what will work. And, in some cases, explanation is easier than in others. When a politician like Kan is riding high in the polls and then comes out with a tax hike and his ratings immediately plunge at a record pace, it's not implausible to suggest a linkage. Asahi in June 2010 explained Kan's abrupt ratings drop by saying he had "alienated people who oppose a consumption tax increase."

Finally, if you don't mind, I'd like to ask you same the question I'm asking others: do you think the tax hike is a good or bad idea in terms of economic substance, rather than political cost? Also, it would be interesting to see whether political scientists and economists tend to assess the political costs differently. Also, whether political scientists and elected politicians assess the political costs differently. Certainly, the scared DPJers with whom I speak blame the tax hike, among other things, even those who support the hike as a matter of policy.

One question for the political scientists on the Forum.
Regardless of your own assessment of the political costs of the tax hike, how do you think politicians (including backbenchers) in the various parties will assess it? Do you think that politicians--especially backbenchers who spend lots of time going to their districts every weekend to get the pulse of the voters--have a comparative advantage in assessing the costs compared to political scientists?

Richard Katz
The Oriental Economist Report