(For more stories on the Japanese economy, click [ID:nECONJP])

* Tax cut is part of overall tax code for next fiscal year

* Govt likely to agree tax, budget guidelines this week

* Govt racing to compile next fiscal year’s budget by Dec. 24 (Adds details, direct quote)

By Stanley White

TOKYO, Dec 13 (Reuters) - Japan’s prime minister on Monday ordered cabinet ministers to lower the corporate tax burden by 5 percentage points from the fiscal year starting in April in a bid to improve the competitiveness of firms in the country.

The cut in the effective tax rate for Japanese companies, which is higher than most major economies at around 40 percent, is part of the Democratic Party-led government’s overhaul of the tax code that will form the basis for compiling the 2011/12 state budget due on Dec. 24.

It was unclear from Prime Minister Naoto Kan’s comments how the government would fund the tax cut, which has stalled debate on the government’s tax panel.

The finance ministry says the government would lose about 1.5 trillion yen ($18 billion) in tax revenue from the cut and that the loss must be made up by expanding the tax base.

The trade ministry, which originally proposed the cut, has offered to tighten some corporate accounting rules, but that would save the government only half a trillion yen.

“By cutting corporate tax by 5 percentage points, businesses can expand domestic investment, boost jobs and increase workers’ income,” Kan told reporters.

“Investing in those areas will lift the domestic economy, facilitate economic growth and help overcome deflation. I plan tell companies to invest in these areas actively.”

The tax panel decided earlier on Monday to increase the tax burden on the wealthy, but it remains to be seen how accepting the public will be of changes to the tax code that increase the strain on some households while lowering the burden for the corporate sector. [ID:nTOE6BC06X]

This could become a sensitive issue for Kan’s government as it is struggling with low voter support and signs of revolt within the ruling party over Kan’s leadership style.

The bills needed to change the tax code aren’t guaranteed to pass parliament because the Democrats need the support of opposition parties to pass laws due to a split parliament.

The government is likely this week to compile tax and budget guidelines so it can prepare the 2010/11 budget by the end of the year.

The Democrats have repeatedly pledged to stick to a 44 trillion yen cap on new bond issuance and a 71 trillion yen spending target, excluding debt servicing costs, for the fiscal year starting April 1. (Additional reporting by Kaori Kaneko and Linda Sieg; Editing by Joseph Radford)