Tax Impacts

Japan Will Cut Corporate Income Tax Rate

Posted on Tuesday, December 14, 2010

TOKYO — Japan will cut its corporate income tax rate by 5 percentage points in a bid to shore up its sluggish economy, Prime Minister Naoto Kan said here Monday evening.
Companies have urged the government to lower the country’s effective corporate tax rate — which now stands at 40 percent, around the same rate as that in the United States — to stimulate investment in Japan and to encourage businesses to create more jobs.
Lowering the corporate tax burden by 5 percentage points could increase Japan’s gross domestic product by 2.6 percentage points, or 14.4 trillion yen ($172 billion), over the next three years, according to estimates by Japan’s Trade Ministry.
It was unclear, however, how Japan would make up for the estimated 1.5 trillion yen ($18 billion) decline in tax revenue that a 5 percentage-point corporate tax cut would mean for government coffers. The Japanese government is already heavily indebted, with total public debt approaching twice the size of its $5 trillion economy.
Announcing the reduction to reporters outside his official residence after deliberations by a government tax panel, Mr. Kan stressed what he said were the benefits of such a cut. Japan’s corporate tax rate stood at around 50 percent in the 1990s, but has been gradually reduced.
“By daring to go with a 5 percent reduction, we will spur companies to invest domestically, expand employment and raise wages,” Mr. Kan said. “That will stimulate the domestic economy, support growth and shake off deflation.”
Japan’s economy grew by a revised 1.1 percent in the three months to September from the previous quarter, topping a preliminary estimate, the government said last week. But a spate of weak data in recent weeks has raised concerns that Japan’s recovery from the global economic crisis may be losing steam.
The country’s unemployment rate worsened slightly in October, edging up to 5.1 percent, as both industrial production and household spending slipped. The jobless figure is low by international standards but close to historic highs in Japan.
Japanese companies have amassed unprecedented amounts of cash since the lean years of the 1990s, but have not reinvested the funds to expand domestically or increase employment or payrolls. A tax cut could whet companies’ investment appetite, the government hopes.
The government is also worried that a strong yen is prompting companies to move production overseas, hurting jobs in Japan. Both a strong currency and relatively high corporate tax rate places Japanese companies that repatriate profits at a disadvantage in foreign markets.
In a survey of nearly 23,000 companies published this month by the credit research firm Teikoku Data Bank, more than 44 percent of respondents cited lower corporate taxes as a prerequisite to stronger economic growth in Japan. That outranked measures to stimulate employment, at 41.9 percent, or further government deregulation, at 21.8 percent.
A 5 percentage-point tax rate cut is unlikely to do much to solve Japan’s woes, however. An effective corporate tax rate of 35 percent would still be higher than South Korea’s 24 percent or Germany’s 29 percent, for example.
Moreover, economists say that Japanese companies are reluctant to invest in Japan, not because of corporate tax levels but because they are not confident that the domestic economy will keep growing — especially against the backdrop of a shrinking population.
“We think this reflects poor prospects for long-term growth in Japan,” Takuji Aida, the Tokyo-based senior economist for UBS, said in a note last month. Still, he said, “stable currency markets and a more internationally competitive tax system will be essential.”
Meanwhile, the government is trying to offset lost tax revenue with tax increases elsewhere, which could blunt the effect of reduced corporate tax burdens. Mr. Kan has said the government should consider raising Japan’s 5 percent consumption tax rate, one of the lowest in the industrial world. That could expand Japan’s tax base, but dampen much-needed growth in consumer spending.
But the hope is that a lower corporate tax rate will “spark corporate activity” and sharpen Japan’s competitive edge overseas, encouraging businesses to hire, in turn bolstering incomes and consumption, Teruhiko Mano, a researcher at Mitsubishi UFJ Research and Consulting, said in a note.
“There may be doubts over why Japan must lower its corporate tax rate when its tax revenues are insufficient,” Mr. Mano said. “But to maintain and stimulate corporate activity and gross domestic product, it is imperative to attract people, products and funds to Japan. A high corporate tax rate has been one big barrier.”


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