EDITORIAL: Corporate tax reduction

Whether and how much the tax burden borne by companies should be reduced has emerged as a key question for the nation's strategy to increase investment and job opportunities by attracting more foreign businesses.

Prime Minister Yukio Hatoyama has told the Diet that the right policy is to guide corporate tax to lower levels, in line with the international trend. There has been a rush by countries to cut corporate tax rates in recent years, as a way of attracting the capital flowing across global markets.

These countries want to increase business investment in new offices, factories and sales bases as a means to stoke economic growth and create jobs at home. They are prepared to ease the tax burdens on companies in order to achieve these policy goals. Such thinking is behind the race to reduce corporate tax.

Japan has also kept slashing its corporate income tax. The basic rate has been 30 percent since 1999, down from more than 40 percent at the end of the 1980s. The overall rate of corporate taxation, including the local enterprise tax, still stands at around 40 percent, however.

The level of taxation is similar to that in the United States, but much higher than the below 30 percent rates maintained by major European countries. South Korea's rate is 24 percent. China's is 25 percent.

Because they are part of society, companies have a natural obligation to pay taxes. From the viewpoint of Japan's international economic competitiveness, however, the government probably has no choice but to consider lowering the tax rate.

Japan can learn a lot from Germany's corporate tax reform in 2008. Thanks partly to the good health of the economy at that time, Germany managed to lower the corporate tax rate to around 29 percent from 39 percent without suffering a fall in tax revenue. The changes also involved eliminating tax breaks, exemptions and loopholes to expand the taxation base.

Britain also lowered its rate to 28 percent, while avoiding a drop in tax receipts.

It should be possible for Japan to cut the corporate tax rate by several percentage points without depressing its total tax take, if it takes effective steps to expand the taxation base.

Japan's tax breaks for companies which invest heavily in research and development has made some contribution to enhancing economic competitiveness. Lowering the overall tax rate would bring benefits to all companies, including small and medium-sized businesses.

But a bigger cut would be difficult to implement because it would require the government to find fresh revenue sources to make up for the lost tax revenue.

One option for offsetting a corporate tax cut would be increasing the load on individual taxpayers by hiking, for instance, the consumption and individual income taxes. But any policy which passes the burden on to households would trigger a major public backlash. Any proposed consumption tax hike would provoke calls to use the additional revenue to finance the health care, welfare, pension and other social security programs.

The companies that would benefit from a tax cut should be obliged to make contributions to social security by maintaining and creating jobs at home. It is also essential to craft a plan to ensure that the tax cut would have positive spillover effects on households' economic well-being.

Simply lowering corporate tax will not be enough to increase business investment. In order to achieve that, Japanese markets and society must be rich in business opportunities and the potential for growth.

We therefore urge both the ruling and opposition parties to lay out a strategic vision for both tax reform and economic growth, including a future hike in the consumption tax rate, as part of their efforts to secure voters' support in the Upper House election this summer.

--The Asahi Shimbun, April 9