Reduce the corporate tax says Kan
Prime Minister Kan intends to reform the tax system in a bid to drive economic growth. Effective corporate tax in Japan is among the highest in the world. At 40.69%, it dwarfs the OECD average of 26.5%. But fiddling with tax rates is a political risk for Kan and might threaten Japan’s fragile finances.
Kan is not alone in championing tax reform. The Ministry of Economy, Trade and Industry has called for a reduction of corporate tax in its “vision for industrial structure”. It cites greater profitability for Japanese corporations as something they sorely need. High taxes mean they have fewer operational and R&D funds, limiting their ability to compete internationally. Indeed, Japanese firms are being out-muscled in the international arena by rising giants such as Samsung, who pay only 25% corporate tax in Korea. Japan’s ability to retain its technological superiority is also in doubt.
Slashing corporate tax should make Japan a more attractive destination for foreign companies. Regardless of the lower productions costs in China, Korea or Taiwan, Japan has much to offer foreign companies: high quality manufacturing, diligence, stability and legal infrastructure. Now companies are avoiding Japan, as corporate tax is excessively high and markets are highly regulated. Japan could do well to emulate countries such as Singapore and offer tax incentives.
On the other hand, decreasing corporate tax could damage Japan’s fiscal position. Its tax gap is considerable. According to the Nikkei, every 1% of corporate tax reduced will require
Y200bn of funding from another source. This is not something Japan can readily afford, especially in the face of increase welfare demands by the public due to an ageing population. While the Nikkei quotes eliminating targeted tax breaks as a source for Y915.9bn, including funding for Japan’s R&D, it will not be enough to cover the proposed cuts. The Ministry of Finance estimates that Y2trn will be needed, and increasingly it doesn’t look like Japan can cut any more public funding.
Economists and political analysts have listed solutions though. In a joint article, Naomi Fink, Japan strategist at Mitsubishi UFJ, and Tobias Harris, author of Observing Japan, believe Japan needs to lower corporate tax and broaden the tax base. Quoting OECD figures, they note that only half of large Japanese corporations pay tax, and one-third of companies overall. Broadening the tax base by including more companies would increase tax revenue. It would also reduce the government’s exposure to the business cycles of large companies.
Another way to boost tax income could be to raise consumption tax in increments, say economists such as Jesper Koll, a strategist at JPMorgan, quoted in the Economist. According to the OECD, a one-point hike in consumption tax (currently at 5%) is the equivalent of 0.5% of GDP.
In the past tampering with the consumption tax has spelled political suicide for leaders, but this time could be different. The public seems ready. In a national telephone survey held in June, 66% were in favour of bumping up consumption tax.