I recently attended a lecture given by Arnold Kling, who is a former Federal Reserve economist on the Board of Governors staff, former senior economist at Freddie Mac, and all-around financial and monetary expert. The...
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- Japan Attracting Business with Corporate Tax Reforms
Japan Attracting Business with Corporate Tax Reforms
The Wall Street Journal reports that Japan will likely reduce its corporate tax rate starting next year, possibly in stages down to around 25 or 30 percent. This would make Japan more competitive with its nearest neighbors, particularly China which has a 25 percent corporate tax rate. Currently, Japan has the second highest corporate tax rate in the developed world at about 35 percent, while the U.S. has the highest corporate tax rate at 39.1 percent (including national and subnational taxes). If Japan cuts their corporate tax rate the next highest corporate tax rates in the developed world would be in France and Belgium, both at 34 percent.
Japan appears likely to raise its consumption tax next year from 8 percent to 10 percent, partly to offset any lost corporate tax revenue. The Journal has an interesting graphic indicating that Japan’s consumption tax already raises more revenue than its corporate tax, and with a rate that is less than one-quarter the corporate tax rate.
These reforms follow corporate rate cuts in each of the last two years that reduced Japan’s corporate rate from the highest in the developed world, at 39.5 percent, to now the second highest behind the U.S. Further, in 2009 Japan switched from taxing multinational corporations on a worldwide basis, as the U.S. does, to taxing them on a territorial basis, i.e. exempting profits earned outside Japan. The territorial approach is now the international norm, and is yet another area where the U.S. lags behind the competition.
Unlike the U.S., Japan is making solid commitments to reform its corporate tax system so as to be competitive as a place to invest and headquarter a company. Although it’s in the early stages, there are some signs that the reforms are working. For instance, another headline in today’s Journal is “Dai-ichi to Buy Protective Life for $5.7 Billion.” Dai-ichi is a Japanese life insurance company and Protective Life is a U.S. life insurance company based in Birmingham, AL. Starting in January, Protective Life will be a wholly owned subsidiary of Dai-ichi, and the new company will pay tax under Japan’s more competitive tax rules. Particularly, due to Japan’s territorial tax system, any foreign profits of Protective Life will now be largely exempt from either U.S. tax or Japan tax. Those profits will be taxed only where they are earned. That is the way most countries outside the U.S. treat multinational corporations.
Another sign came last year, when Suntory Holdings of Japan announced it was buying Beam, Inc., maker of Jim Beam, Makers Mark, Laphroaig Scotch and other liquors with worldwide appeal. Also last year, Sprint was purchased by Tokyo-based Softbank, and now that company is trying to take over T-Mobile.
More than a dozen companies have left the U.S. in recent years, mainly for low-tax countries such as the U.K. and Ireland. Many others, such as Pfizer, are quite publicly contemplating it. The best way to keep these companies, and to encourage others to move here, start here and grow here, is to reform the corporate tax by lowering the rate and switching to territorial taxation.
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