Friday, September 20, 2013
OPINION: Business-Friendly Tax System Key To Growth
TOKYO (Nikkei)--The government of Prime Minister Shinzo Abe is taking a small but important step toward easing the tax burden on companies operating in Japan, which is substantially heavier than the international average.
Governments around the world are vying with one another to attract footloose global capital by offering lower corporate tax rates. The average effective corporate tax rate among industrial and Asian nations fell by 7 points during the decade starting in 2000. It is now in the mid-20% range.
Major economic powers, including the U.S. and Britain, are moving in this direction because corporate tax rates are a key determinant of international competitiveness. Lower corporate taxes attract investment, creating jobs and pushing up wages.
Keep Them Coming
Temporary tax breaks can also boost investment and growth, but their effects dissipate over time and they are rarely enough to persuade domestic and foreign companies to maintain or expand operations in Japan rather than moving to countries where the tax burden is lower. That is why Japan needs to cut its corporate tax rates.
Some policymakers in Abe's government are skeptical that cutting business taxes will benefit the economy. They argue that many Japanese companies will simply build up their cash reserves if a tax cut boosts their bottom lines. To encourage investment, employment and wage hikes, targeted tax breaks would be more effective, they say.
But If Japan fails to lower the business tax, Japanese workers could be big losers, says Takero Doi, a professor at Keio University. A high effective corporate tax rate depresses corporate profits and crimps job and wage growth. If companies move operations abroad due to Japan's heavier tax burden, the country will suffer employment and wage losses.
Opponents of change say it would be unfair to cut the corporate tax while increasing the tax burden on individuals by hiking the consumption tax, but reducing the tax load on businesses also helps consumers.
Some in Abe's team claim cutting corporate taxes will not do much to boost the economy, given that only 28% of all Japanese companies make profits and pay taxes. But 54% of companies capitalized at 100 million yen or more are profitable, and they account for 60% of total corporate profits. Lessening their tax burden would, in fact, have an effect.
Even if the effective corporate tax rate is lowered to the 35% in fiscal 2014 as proposed, the rate will still be considerably higher than the 25-30% rate typical in other advanced countries.
Share The Load
The challenge is how to make up for the lost revenue when business taxes are lowered. To do that, Shigeki Morinobu, a professor at Chuo University, says sweeping reform of the tax code is needed at both the national and local level. In Japan, local corporate taxes are markedly higher than in other advanced economies.
Morinobu is among those calling for cuts in local business taxes, paid for by increases in real estate and residential taxes.
Some economists are also arguing for measures to expand the tax base, that is, the number of firms paying national business taxes. Others propose that revenues from a higher consumption tax should be used to finance corporate tax cuts, in addition to funding social security programs. What is clear is that a major overhaul is needed if the Abe government is to create a tax environment friendly to business and investment.
--Translated from an article by senior Nikkei staff writer Hiroyuki Kotake
(The Nikkei, Sept. 20 morning edition)