BANGKOK — It is a hopeful sign that professor Masaaki Honma of Osaka University has been set to be appointed chairman of the tax panel that briefs the prime minister. This would be a happy departure from the position of the current chairman of the tax panel, Hiromitsu Ishi, who consistently advocated raising taxes to bolster state finances.
In a statement after news of his possible appointment was made public, Honma stated that he will consider recommending corporate tax cuts to boost economic growth. This would be an important step given that Japan has not matched the reforms of corporate taxation systems carried out among its competitors.
Japan, China and Thailand all have a 30 percent corporate tax rate while Malaysia has a slightly lower rate of 28 percent.
But other regional competitors like Hong Kong, Taiwan and Singapore impose corporate tax levies of 16 percent, 25 percent and 22 percent, respectively. Korea imposes a corporate rate of 15 percent for firms with annual taxable income below 100 million won and 27 percent for those earning 100 million won or above.
Lower corporate tax rates would support the announced aim of Prime Minister Shinzo Abe to inspire high economic growth. As it is, there is considerable evidence that cutting corporate taxes strengthens the international competitiveness of domestic companies.
Honma, currently acting chairman of the Fiscal System Council, was asked to reveal his position on the consumption tax. His deferral to comment concurs with government plans to shelve debate on the consumption tax until next autumn.
High tax burdens and excessive regulation are among the usual suspects that bring slower economic growth since that they hinder entrepreneurial risk taking. Fewer new investments and less growth lead to lower overall living standards than are possible. And so it is that combining permanent cuts in corporate tax rates with deregulation will release the creative power of entrepreneurs for the benefit of most of the community.
As it is, the corporate income tax is the least efficient and least defensible of all the taxes that governments choose to impose. And there is wide agreement among economists that it causes significant distortions in economic behavior.
In the first instance, it is difficult to measure with precision where the burden of the corporate income tax falls. It turns out that corporations never pay taxes, per se, since only individuals ultimately pay taxes. Just as higher real wages or higher welfare benefits are not created out of thin air, it is a fantasy to imagine that corporations pay higher taxes without having an impact on shareholders and providers of inputs, like labor.
Since corporate revenues reflect receipts on sales, attempts to expand their net revenues will encounter customer resistance. As such, raising prices to offset the costs of increased taxes or wages will lead to lower corporate revenues. This means that higher taxes will reduce the capacity to invest in R&D or thwart plans to expand the workforce.
It is also possible that taxing corporate income will drive some firms out of business. This can lead to lower demand for labor so that wages fall while fewer goods are produced. With fewer goods relative to unchanged demand, prices to consumers tend to rise.
So, although part of the burden of corporate income taxes falls on shareholders, workers will tend to receive lower wages and find fewer jobs as consumers pay higher prices.
Corporate income taxes misallocate capital by favoring the issuance of debt over equity by allowing interest payments to be deductible while dividend payments are not. This will lead to more investments in assets that are more easily financed by debt like buildings that can be used as collateral for loans. And since interest payments are deductible, established firms are better positioned than new startup companies since established firms find it less costly to issue debt securities.
Reducing the overall tax burden on companies is properly seen as part of a strategy to raise long-term economic growth. Permanent reduction of tax rates changes the pattern of spending and can lead to more productive efforts that generate jobs and income for the rest of the community.
Cutting tax rates are important since the driving forces behind economic growth are capital accumulation funded by savings combined with entrepreneurial initiatives. Experience shows that reduced tax rates promote economic growth and lead to higher government revenues once economic activity is unleashed. This works by allowing entrepreneurs and investors to keep more of their capital gains so they can invest more of their profits to create other rounds of economic growth that can raise overall living standards.
Indeed, cutting taxes can lead to win-win-win outcomes. First, they allow more investments in new or more efficient use of existing capital equipment. Second, these investments boost productivity causing profits and real wages to rise. Third, the increased prosperity of workers and capital owners will trigger higher economic growth rates so that tax revenues eventually rise.
Given Japan’s large central government debt, there is good reason to seek ways to restore fiscal health. However, restoring long-term economic growth is more important than allowing the government balance sheet to worsen a bit.
In all events, the best way to solve the problem of rising public debt is to exercise sufficient political will to control or reduce spending.
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