Last month, I wrote that there was pressure being placed on Japan’s leaders to lower their corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate.
Experts in Japan believed that simply flirting with the idea of a reduction from 37 percent to as low as 32 percent would “have a psychological impact on firms and help to spur their growth expectations and encourage investment.”
It seems as though that Prime Minister Shinzo Abe of Japan has taken this advice. According to a Bloomberg article, the Prime Minister “is considering a corporate tax cut.”
The prime minister asked for a study of a lower corporate tax rate as a “counterweight” to a proposed sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. increase of about 3 percentage points. Reuters reported that he is considering a corporate tax rate as low as 30 or 25 percent as an offset. This is part of the government’s two-part strategy to increase economic growth and reduce Japan’s 1 quadrillion yen debt.
The lowering of the corporate tax rate from 37 percent to as low as 25 percent, while making it up with an increase in the sales tax rate is good tax policy.
Japan has famously had one of the highest corporate tax rates for many years. Most research has shown that high corporate tax rates are the worst for economic growth compared to other types of taxes. The same research also finds that sales taxes are comparatively less destructive to the economy. Trading one for the other and moving to more consumption-based taxation is a positive, pro-growth reform.
In addition, it would improve their overall international competitiveness. If they were to lower their corporate tax rate from 37 percent down to as low as 25 percent they would be right around the OECD average. Corporations would find Japan more economically attractive than about half the OECD.
This of course spells more trouble for the United States. We already have the highest corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate in the world at 39.1 percent. Japan is currently right behind us at 37 percent. If they were to lower their tax rate to the OECD average it would put us even further from the international norm. The United States wouldn’t just have the highest statutory corporate income tax rate in the world; its rate would now stand nearly 5 percentages points higher than the next country France, which has a rate of 34.4 percent.
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