Second-Highest Corporate Tax Rate

Prime Minister Abe Shinzō’s latest package of economic reforms, approved by the cabinet on June 24, 2014, calls for the lowering of the effective corporate tax rate to under 30% to encourage greater investment by foreign firms and to enhance the competitiveness of Japanese industry.

The race to lower corporate tax rates originated in Eastern Europe in the 1990s following the end of the Cold War and eventually grew to engulf the rest of the world. The rate among the countries belonging to the Organization for Economic Cooperation and Development declined by an average of 20 percentage points in just 20 years.

Japan has not been left behind in following this trend, lowering its rate in 1998, 1999, and again in 2012, but it still stands several percentage points above other industrialized countries and around 10 points higher than other countries in Asia; today, it maintains the second highest rate in the world after the United States.

Japan’s comparatively higher tax rate and energy prices have pushed up the cost of doing business here. This, coupled with the long overvalued yen, has prompted many companies—primarily those competing in the global market—to move offshore, inviting deindustrialization and the loss of jobs in Japan’s outlying regions. The Abe administration’s moves to lower the rate represent an attempt to restore Japan’s competitiveness as a locus of business operations and to stem the tide of deindustrialization and job loss.

A Lower Rate Is Not Enough

In this sense, the lowering of the corporate tax rate is less of a proactive policy than a response to changes in the business climate. Whether it has an impact on boosting capital spending among domestic businesses and inducing foreign firms to move into Japan will hinge on the kind of growth strategies that are implemented going forward.

If Japan’s chief rivals are regarded as being other Asian countries, then the effective corporate tax rate needs to be lowered by around 10 points to 25%.

Generational Differences in Public Opinion

An opinion poll conducted on June 27–29 by the Nikkei and TV Tokyo (published in the June 30 morning edition of the paper) revealed that those favoring or opposing a lower corporate tax stood even at 40%. Younger respondents were more inclined to be in favor, with 56% in their twenties and thirties saying they were for a lower rate, as opposed to 26% who were against. The corresponding shares for those in their sixties, on the other hand, were 37% and 45%.

One likely reason for the strong public resistance to a lower rate is that the consumption tax has just been hiked to meet the revenue needs of supporting an aging population, prompting consumers to wonder why they must pay more while businesses pay less—especially since the economic benefits of a lower corporate rate have not been convincingly verified.

Such public concerns must be assuaged by clearly spelling out policies designed to minimize any revenue shortfalls through an expansion of the tax base, primarily for the corporate tax, and to reform those aspects of the corporate tax systems that have come under criticism.

Indeed, the Basic Policies for Economic and Fiscal Management and Reform—the growth strategy Abe announced on June 24—explicitly states that while the effective corporate tax rate will be lowered incrementally over several years to below 30%, it will be done so in ways that will not result in revenue shortfalls—such as by expanding the tax base to secure permanent revenue sources—nor impede the closely monitored progress toward the goal of achieving primary balance by fiscal 2020.