The plan to cut the corporate tax won’t be “a magic wand,” warns Hiroshi Yoshikawa, a key adviser to the finance minister.
The Abe administration on Tuesday adopted new economic and fiscal policy guidelines that call for, among other things, lowering Japan’s effective corporate tax rate to less than 30 percent in stages starting next year. The current rate stands at about 35 percent.
“The tax rate cut is in the right direction, but it will not be a magic wand” for promoting economic growth, said Yoshikawa, a University of Tokyo professor who heads the influential Fiscal System Council, which advises the finance minister.
When steps to gradually lower the corporate tax rate were adopted in and after the late 1990s, companies didn’t boost investment or raise wages, he said in a recent interview, stressing that tax cuts must be coupled with true deregulation and other steps to rev up economic activity.
The government aims to have the primary budget balance show a surplus in fiscal 2020, but Yoshikawa warned that “the attainment of the fiscal reconstruction goal will certainly be pushed back if the effective corporate tax rate is reduced,” underscoring the need to secure alternative sources of revenue to offset the drop in taxes. He recommends reviewing tax breaks for certain industries.
On Japan’s current economic situation, Yoshikawa said the demand slump in the April-June quarter following the rush to beat the first stage of the sales tax hike on April 1 was “within expectations” and said the economy has made “a soft landing.” He said the administration should carry out the second stage as planned in fiscal 2015, hiking it to 10 percent.
On the spending front, Yoshikawa said social security costs are expected to rise substantially in the medium to long term, calling on officials to seriously consider narrowing the scope of social security payments while compiling the fiscal 2015 budget.