Tax Relief for Japanese Business

A corporate tax cut would improve Japan’s competitiveness among industrialized nations.

The Japanese government, headed, since Prime Minister Yukio Hatoyama resigned earlier this month, by former finance minister Naoto Kan, announced on Friday that it intends to bring down the country’s corporate tax rate. Tax relief for Japanes business is supposed to stimulate the economic recovery and end years of persistent deflation.

A corporate tax cut would “strengthen the competitiveness of companies based in Japan and encourage investments by foreign companies,” according to the government’s new “growth strategy.” The same document calls for merging various financial exchanges in order to enhance Japan’s role as a regional financial hub.

At 40 percent, Japan’s corporate tax rate is highest among major economies. The international average is close to 25 percent. The extra growth that a tax cut should stir is expected to make up for about two-thirds of the income the state is set to lose as a consequence. The government is reportedly considering to raise the value-added tax rate instead, possibly up to 10 percent. For comparison, the minimum standard VAT rate throughout Europe is 15 percent.

The value-added tax is politically sensitive in Japan. When the government last raised the VAT rate, from 3 to 5 percent, in 1997, consumer spending dropped dramatically, leading Japan into a deep recession. Since, politicians have hesitated to even mention the phrase.

Naoto Kan startled reporters on Tuesday therefore when he described a raise in sales taxes as “inevitable” should Japan endeavor to bring its public finances in order. Earlier he had already called tax reform unavoidable. “If we maintain the current level of issuance of new bonds, outstanding debt will surpass 200 percent of GDP in a few years,” he predicted. Indeed, the International Monetary Fund estimates that Japan’s gross debt is likely to reach 225 percent of GDP by the end of this year already. Japan desperately needs to rein in spending. From the looks of it, Kan may be more intrepid in this regard than his predecessor.