Japan May Relinquish Title of World’s Highest Corporate Tax; U.S. Would Be Number 1

Japan's Prime Minister Naoto Kan recently announced that he plans to cut the country's top corporate tax rate from 40% to 25% in increments and expand the tax base. Currently, the country imposes the highest corporate tax among industrialized nations, an "honor" which it now seems the United States will soon have (see Table 1).

Differences in corporate tax rates could play a major role in deciding which nations' economies recover most rapidly from the recessions and stagnation that prevail in many parts of the world. U.S. investors and entrepreneurs will continue to move their finances and innovative ideas to those foreign countries that do not disproportionately penalize risk-taking and success. Citing the work of OECD economists almost a year ago, we wrote that high corporate income taxes are especially harmful to economic growth because they "have a negative effect on capital accumulation, which can retard productivity, which, in turn, eventually affects GDP per capita."

The Japanese plan is just the latest among many foreign governments to try sparking an economic recovery with a plan that includes trimming government spending, privatizing some government operations, and cutting the corporate tax rate. Japan can reasonably expect to attract more foreign investment with this plan, which would yield new jobs and tax revenues. Additionally, by imposing a lower maximum rate across a wider base, the Japanese tax system will become more simple and neutral because fewer industries will be given preferential tax treatment.

Meanwhile, the U.S. government continues to act on the theory that economic growth will result from increased government spending and control. Some have compared the U.S. recession to a grease fire, and it seems as if President Obama and the Congress just want to throw water on it. However, as we all know, if you throw water on a grease fire, you just make the fire bigger until your oven blows up!

See Also: "The Importance of Tax Deferral and a Lower Corporate Tax Rate"

Table 1: Combined Federal-State Corporate Tax Rates in OECD Nations – 2010