Japan PM may sweeten sales tax hike with corporate tax cut

Tue Aug 13, 2013 4:32am EDT
 
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By Stanley White and Tetsushi Kajimoto

TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe may look at cutting corporate taxes to ensure he can push through a planned sales tax increase as he seeks to show he has a strategy to both foster an economic recovery and contain the country's enormous public debt.

Lowering corporate taxes could spur weak business investment and bolster his policies to revive the world's third-largest economy, but it would also undermine the revenue-raising goal of a planned doubling of the sales tax over the next two years.

However, without it Abe may not be able to push ahead with a sales tax hike that is seen as a litmus test of his commitment to contain public debt, which at more than 1,000 trillion yen ($10.4 trillion) is more than twice the size of the economy.

The Nikkei, citing government sources, reported Abe could consider lowering the corporate tax rate to 25 to 30 percent from current levels around 38 percent. A source confirmed to Reuters than Abe was looking at a cut in the tax rate.

"This is like trying to kill two birds with one stone," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management.

"The government knows that it needs to improve its growth strategy and that it needs to address concerns about the economy slowing down."

The possibility of corporate tax cuts have resurfaced as Abe nears a decision on whether to proceed with a multi-party agreement to raise the 5 percent sales tax to 8 percent next year and then to 10 percent in 2015.

The government expects that doubling the sales tax could increase revenue by around 13.5 trillion yen a year.   Continued...

 
A man works inside a factory in Tokyo August 12, 2013. REUTERS/Yuya Shino