At 35.65% Japan has a higher taxation rate than any other country in the world, except the United States (40%) and United Arab Emirates (55%). The corporate tax rate in China is 25%, Japan’s largest trading partner (total trade 1.62X Japan’s trade with the US). South Korea’s corporate tax rate is 24.2%, Taiwan’s 17%, Australia’s 30%, Thailand’s 20%.
Most of these trading partners have reduced their corporate tax rates over the last 10 years, and as part of the Abe government’s growth strategy, Japan will likely propose lowering its corporate tax rate from 35.65% to 20% next month. This reduction is intended to encourage companies to increase capital investment in Japan. Also being considered are tax breaks to stimulate greater investment in start-ups.
It remains to be seen whether the corporate tax reduction under consideration will substantially boost Japanese corporate investment in Japan. Other factors driving Japanese investment are wage costs and the strategic objective to expand markets overseas to offset the impact of a declining domestic population. In general, the preference would consistently be to manufacture in Japan assuming that the overall investment climate, including the wage cost factor, is favorable.
Large Japanese companies don’t really need the cash flow benefits of tax reduction. They are awash with cash. “Japan, Inc” is sitting on a cash pile the size of the total Brazil economy.
The Abe government is betting that the tax cuts will pay for themselves—that the initial decrease in tax revenue will be offset by greater corporate investment and profits, bringing in greater tax revenue.
This is a big bet, as the initial effect has to be offset elsewhere. Increased Japanese government bond financing? Japan’s public debt as a percentage of GDP (214%) is the highest in the world, higher than Zimbabwe(202%), Greece(161%), Portugal(129%). Even if held domestically, this is leverage to the hilt and at some point is unsustainable.
If corporate taxes in Japan are reduced to bring the level competitively in line with other countries, the government should offset that loss in revenue by getting a lid on the wasteful spending on projects that placate cozy vested interests.
Tax breaks to encourage start-ups make sense but the criteria should be well-thought out. Simply throwing money at any harebrained scheme squanders public resources. Incentives to angel investors might be effective since those investors have skin in the game, as do venture capitalists.
All the best,
Warren J. Devalier
©2014 Warren J. Devalier