EDITORIAL: Doubts remain on effectiveness of corporate tax cut
The Abe administration has decided to lower the effective corporate tax rate to less than 30 percent next fiscal year. The reduction of taxation on corporate profits will come earlier than originally scheduled.
The Finance Ministry and other related government bodies had agreed with Keidanren (Japan Business Federation), the nation’s most powerful business lobby, to lower the rate more gradually, from the current level of slightly higher than 32 percent to below 30 percent in fiscal 2017.
But the prime minister’s office, which has been keen to push through corporate tax reform, has decided to quicken the pace of the tax reduction.
If the proposal is implemented, the effective corporate tax rate will have been lowered by a total of 7 percentage points since Prime Minister Shinzo Abe returned to power in December 2012.
The corporate tax reform is aimed at re-energizing the economy by encouraging companies to raise wages and expand their investment in equipment and facilities.
Both wages and corporate capital investment are showing signs of growing, but only moderately. Instead of spending heavily to increase wages and capital investment, companies are building up their cash reserves.
Will simply accelerating the pace of tax reduction produce expected results? Or is there a more focused and effective approach to stimulating companies to ramp up their spending?
The Abe administration has made the decision without holding sufficient debate on these and other questions that should be sorted out.
The process leading to the decision raises even more questions about the wisdom of the measure.
In its talks with business leaders, the Abe administration made repeated requests for wage hikes and expansion of investment even though decisions concerning these issues should in principle be left to individual companies.
Those in the business community responded to these requests by saying they need a corporate tax cut and other measures to ease their burden.
In the end, Keidanren expressed the “expectation” that profitable companies will give their employees bigger wage hikes next fiscal year than the increases in the current year. The business group also made the “projection” that corporate capital spending will increase by 10 trillion yen ($81.6 billion) from this year to more than 81 trillion yen in fiscal 2018.
The administration welcomed Keidanren’s replies as “important messages” and decided to push down the effective corporate tax rate.
During the talks between the government and the business community, however, more time could have been spent on such relevant issues as the merits and demerits of so-called special tax measures.
Special tax measures could degenerate into hotbeds of vested interests, but they often produce immediate effects.
There are currently special tax benefits in place for achieving such policy objectives as promoting capital investment and research and development spending by companies and stimulating wage and job growth. But there may be room for improvements and upgrades in these measures.
Proponents of lower corporate taxation claim the effective tax rate in Japan is high by international standards and serves as a factor that discourages foreign companies from expanding into Japan.
But is the corporate tax rate really the main cause of stagnant growth in foreign direct investment in Japan?
The government and the ruling coalition intend to adjust the rules concerning the corporate enterprise tax, a local tax, to prevent the cut in the effective corporate tax rate from making a big dent in the tax revenue.
Specifically, the scope of so-called pro forma standard taxation, which is based on measures of the companies’ size, such as payrolls and interest payments, instead of profits, will be expanded to increase taxation on money-losing companies. Only large companies with capital exceeding 100 million yen are subject to this local tax.
This policy of expanding the taxation base by using pro forma standard taxation while reducing the effective tax rate is in line with the latest international trend.
But there can be a serious debate on whether it is appropriate to exempt small and midsized companies, many of which are unprofitable, from the tax.
Individual taxpayers in this nation are facing the prospect of a higher consumption tax.
Unless they become more convinced of the benefits of the corporate tax reform, Japanese consumers could start feeling strong doubt and discontent about the tax system as a whole.
The Abe administration needs to be aware of this risk.