The Abe administration will likely lower the corporate tax as a means of achieving a virtuous cycle to put the Japanese economy on a growth path. At the recent World Economic Forum in Davos, Switzerland, Prime Minister Shinzo Abe said, “We must also make our corporate taxes internationally competitive.” The Abe administration is trying to respond positively to requests from business lobbyists for lowering the corporate tax.
Given the reality surrounding the corporate tax, to think that lowering it will automatically lead to an expansion of the economy is simplistic.
Sadayuki Sakakibara, the next head of the Japan Business Federation (Keidanren), Japan’s most powerful business lobby, expressed his hope Monday that the effective corporate tax rate will be reduced to around 25 percent from the current 38 percent in the Tokyo area. But lowering the corporate tax will invite criticism that businesses are being given favorable treatment compared with households, which will directly feel the impact of the consumption tax hike, which will go from 5 percent to 8 percent from April.
The Abe administration has already decided to abolish the 2.55 percent surcharge on the corporate tax for the reconstruction of the areas hit by the 3/11 disasters in April, one year earlier than originally scheduled.
From April, the effective corporate tax rate will be 35.64 percent. But the surcharge for the same purpose added onto the income tax for individuals will continue for 25 years. Households will also pay increased pension premiums and medical service fees.
Attention should also be paid to the fact that exporting companies are given favorable treatment regarding the consumption tax, which is not levied on export products.
It must also be remembered that major businesses are paying less than the effective corporate tax rate due to numerous special tax relief measures aimed at helping them to accelerate research and development activities and capital investment.
Thanks to these measures, the real corporate tax rate for many businesses is reportedly between 20 to 25 percent. The government’s outline for tax reform for fiscal 2010 points out that when payment of social insurance premiums by businesses are taken into account, the burden of Japanese businesses are lighter than that of North American and European businesses.
Furthermore, the corporate tax is not imposed on businesses that are in the red. Reportedly more than 70 percent of Japan’s companies — mostly medium and small-size businesses — are not paying the corporate tax. So lowering the corporate tax will bring no benefits to them. Major corporations will be the prime beneficiaries. Given their penchant for stockpiling internal reserves, currently amounting to ¥220 trillion, the lowering of the corporate tax is only likely to lead to even more stockpiling of internal reserves. Thus the end result will likely be a decrease in the government tax revenue with no desired results on the economy.
The government should rethink its plan to lower the corporate tax and instead give greater consideration to how to prevent a decrease in consumer spending once the consumption tax hike takes effect by implementing measures that directly benefit households.