Shinzo Abe has cleared the main obstacle to his plan to cut Japanese corporate income taxes, securing conditional approval from a pair of powerful groups that had opposed the idea – the finance ministry and tax experts in his own party.
But now the question is whether the prime minister can engineer a broader overhaul of the corporate tax system to address one of its most obvious failings: that in spite of high official rates, only three in 10 Japanese companies pay income tax.
After a series of meetings this week, Taro Aso, the finance minister, and Takeshi Noda, the head of the Liberal Democratic party’s internal committee on tax issues, both told Mr Abe they were open to cutting corporate income taxes as long as new “stable sources” of revenue could be found.
That demand has been taken to mean shrinking or eliminating some of the loopholes, exemptions and credits that have placed the corporate tax burden on a relatively small group of companies.
“We have a narrow tax base because we have so many tax breaks,” said Yoshikazu Miki, a professor of tax law at Aoyama Gakuin University who has advised previous governments on reform efforts. “It makes no sense just to look at the headline rate.”
That rate is high by international standards, at roughly 37 per cent depending on where in the country a company is located. Japan’s rate remains the second-steepest among countries in the Organisation for Economic Cooperation and Development, after the US.
Businesses complain that this has made them less competitive. South Korea, where electronics companies such as Samsung have surpassed once-dominant Japanese groups, imposes a rate of 24 per cent, a shade below the OECD average and 10 points less than Japan.
Sadayuki Sakakibara, who on Tuesday took over as the chairman of the Keidanren business lobby, said that Japan should ultimately aim for the OECD average of 25 per cent. “I’d like to see a real reduction in the corporate tax burden, starting in 2015,” he said.
Exactly how far and how fast the rate will come down remains unclear. The go-ahead from Mr Aso and Mr Noda means that tax cuts can be included in an update of the Abe administration’s economic growth policies that is due later this month. But many details are likely to be left for later, people close to the administration said.
The question of broadening the tax base looks likely to dominate the next phase of the debate. Some in the government argue that the tax burden on companies should simply be lowered, to stimulate growth and tempt both local and foreign companies to invest in Japan.
“No country that has cut corporate taxes has insisted on making it completely revenue-neutral,” said Akira Amari, the economy minister. “It has to be appealing to those who make investment decisions.”
A straight tax cut could be politically difficult, however, given that the government is increasing sales taxes, a move that it has said was vital to bringing down the deficit and stabilising a national debt that is the largest in the world.
“People have accepted higher consumption taxes because they’ve been told the money is needed to shore up the pension and healthcare systems,” said Mr Miki at Aoyama Gakuin. “If you cut taxes on corporations, it undercuts the argument.”
Tax breaks appear to be a tempting target. Even among large corporations, only half pay any corporate income tax, according to finance ministry data. In contrast, the ratio of zero-payers among large US companies is one in four, according to Washington’s Government Accountability Office.