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Japan Studies Corporate Tax Rate Cut For Growth Strategy

by Mary Swire,, Hong Kong

24 January 2014

Japan's Prime Minister Shinzo Abe is looking again at lower corporate taxes to provide a new impetus to growth in the economy, but, as he did last year, Finance Minister Taro Aso has again cast doubt on whether such a policy is viable at the present time.

In a meeting of the Government's tax and economic panel on January 20, its private-sector members recommended that Japan's effective corporate tax rate should be reduced to around 25 percent from its current 35 percent level, so as to encourage foreign investment and further growth in the country.

As a result, later in the meeting Abe instructed members to examine the effect of such a tax cut, with the possible intention of including the proposal as part of a growth package to be announced in June this year. It is reported that Abe even went as far as to suggest that any package need not be revenue-neutral and tax cuts, which could produce revenue increases from future growth, may not be offset by other resources in the short-term.

However, as he had last year, Aso decided that a tax cut was improbable given Japan's need to prioritize the use of its scarce fiscal resources, while it remained with a substantial budget deficit and an already-high level of public debt. He noted that, if the government cut the corporate tax rate by 10 percent, overall tax revenues would be reduced by about JPY 5 trillion (USD47.8bn) annually.

In addition, he has previously said that proposing a corporate tax cut would be difficult while, at the same time, raising consumption tax; and that, as only some 30 percent of Japanese firms actually pay corporate tax, a reduction to Japan's corporate tax rate would not be likely to have an immediate impact on the economy.

It is, nevertheless, foreseen that it will be the Prime Minister who will take the final decision, as he did on the first round of consumption tax increases and on the composition of the stimulus package to accompany it.

TAGS: Finance | tax | economics | fiscal policy | budget | corporation tax | tax rates | revenue statistics | Japan

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