Analysis: Corporate tax cut in Japan - Be careful what you wish for

Wed Aug 21, 2013 12:35am EDT
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By Yoshifumi Takemoto and Nathan Layne

TOKYO (Reuters) - Japan's corporate tax rate is among the highest in the world and getting companies to use more of their earnings to invest and hire is crucial to the economic renaissance promised by Prime Minister Shinzo Abe.

Yet the idea of slashing the corporate tax, floated by the government earlier this month, has received a lukewarm reception from analysts and policymakers, because of doubts over whether it would unleash enough investment to justify the loss of revenue.

To offset the economic impact of a politically unpopular plan to double the sales tax from 5 percent, Abe is considering, according to a Nikkei newspaper report on August 13, cutting the corporate tax rate to between 25 and 30 percent.

Corporate leaders have long called for lower taxes as a measure to shore up Japan's waning economic competitiveness.

Set at 38 percent for a large Tokyo-based corporation, Japan's corporate tax rate is well above the global average of 24 percent, as tracked by KPMG.

Keizai Doyukai, a leading business lobby, has urged lowering the rate to 25 percent.

But, critics, including Finance Minister Taro Aso, question whether a tax cut would provide much of an economic boost, while others warn that it could worsen Japan's fiscal position.

SMBC Nikko estimates that lowering the corporate tax rate by 10 percentage points would cost the government some 2.5 trillion yen ($25.74 billion) in lost tax revenue, more than double the forecast 1 trillion yen boost to economic output.   Continued...

Customers look at Sharp Corp Aquos television sets displayed at an electronics store in Tokyo August 1, 2013. REUTERS/Issei Kato