The Abe administration should put off the consumption tax hike scheduled for next year or raise the rate by 1 percentage point per year if the economy stalls, according to a special adviser to the prime minister.
In an attempt to shore up economic growth, the 35 percent effective corporate tax rate should be cut to around 25 percent, said Koichi Hamada, a Yale University professor emeritus of economics, said in a recent interview.
The remark by Shinzo Abe’s key economic adviser comes on the heels of dismal gross domestic product data released Monday. The seasonally adjusted GDP in April-June shrank a real 7.1 percent from the previous quarter on an annualized basis, posting the steepest contraction since January-March 2009 shortly after the collapse of U.S. investment bank Lehman Brothers.
Hamada, a mastermind of the “Abenomics” policy mix, added that Abe should make a final judgment on whether to go ahead with the second round of the two-stage tax hike in October 2015 after assessing various economic indicators for the July-September period.
The economic situation is “less optimistic than before,” given that the negative impact of the 3-percentage-point consumption tax hike to 8 percent on April 1 and bad weather such as torrential rain have worsened business and consumer confidence, Hamada said.
If the pace of economic recovery slows in the three months through September, the additional tax hike should be delayed by one year, or be increased by 1 point each in October 2015 and in April 2017 to prevent the economy from going into free fall, he said.
Legislation enacted in 2012 stipulates that the government will seek to attain nominal economic growth of around 3 percent and real growth of about 2 percent as a nonbinding target for proceeding with the consumption tax hike, which is aimed at covering swelling social security costs for the graying population.
As a step to avoid a sharp economic downturn following the tax hike, Hamada said the effective corporate tax rate should be slashed to bolster local economies and attract foreign investment to Japan.
The Abe administration has pledged to reduce the relatively high effective corporate tax rate by international standards to below 30 percent within a few years from fiscal 2015.
But the administration has yet to decide on how fast the corporate tax rate will be cut and how it will cover the expected decline in overall tax revenues after the envisioned tax reduction.
Japan’s effective corporate income tax rate — consisting of national and local taxes — is much higher than China’s 25 percent, South Korea’s roughly 24 percent and Singapore’s 17 percent, according to Finance Ministry data.