Japanese Tax Commissioner Releases Corporate Tax Cut Details

November 21, 2006

Back in September, we blogged about predictions that Japan and Germany would move to cut their corporate tax rates in 2007. Last week, according to an editorial in the Japan Times, Masaaki Honma–head of the Japanese Tax Commission–released some details about the proposed cuts. From the article:

“The commission will be reviewing two things — the depreciation-related tax system and corporate tax cuts. At present, up to 95 percent of the value of plant and equipment investment may be counted as a depreciation expense. Raising the rate to 100 percent and shortening the period of depreciation is under consideration. That would enable companies to increase allowable expenses and thus decrease their taxable revenue. It would have the same effect as a tax cut. Nippon Keidanren (Japan Business Federation) is prodding the commission to lower corporate taxes. The business organization would like to lower the effective corporate tax rate, including the effect of local taxes, to about 30 percent — down from the current rate of about 40 percent. The effective rate of Japan’s corporate tax is about the same as in the United States and Germany, but it is about 7 percent to 10 percent higher than in France, Britain and China.”

While our research indicates that Japan currently has the highest statutory corporate tax rate (39.5 percent) in the OECD, the United States is a close second (39.3 percent). Thus, even a small rate cut in Japan would leave the U.S. with the highest statutory tax rate in the OECD.

While this would obviously be a bad development for the competitiveness of the U.S. international tax system, what is truly remarkable is that the U.S. finds itself in this position solely because it has left its corporate tax rate unchanged. Since 2000, the average OECD nation has cut its corporate tax rate by nearly 15 percent, while the U.S. rate is virtually unchanged.

Corporate rate cutting is not just a feature of center-right governments, either. Even the socialists in Spain moved to cut their corporate tax rates in the fact of increasing international competition–especially since there is evidence that countries with higher corporate tax rates don’t actually collect a lot of corporate tax revenues.

It will be interesting to see if the new Democratic majority in Congress takes up the mantra of corporate tax reform as a means to increase corporate tax revenues.


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