Japan's Fukuda May Signal Cut in Corporate Taxes (Update1)Now I know this is a wire service report so I should not be too hard on its authors for sacrificing depth for breadth and speed. Nevertheless, the report is purportedly trying to provide context, analysis and background to a major policy proposal. If that is the goal, why do they offer only one side of the coin?
By Keiko Ujikane and Tatsuo Ito -- June 23 -- Japan's government may signal it will consider cutting corporate taxes in an effort to encourage more foreign investment into an economy expected to grow at the slowest pace in five years this year.
The government will review corporate taxes to help cut business costs, according to a draft of its economic and fiscal policy released last week. The final 2008 policy will probably be submitted to Prime Minister Yasuo Fukuda's Cabinet this month.
"The government recognizes the need to cut corporate tax to help improve Japan's competitiveness,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. "It will be tough to get public support because a company tax cut would reduce revenue and require increasing sales or income tax.'"
Fukuda's first economic policy statement as prime minister comes as foreign investors urge Japan allow more foreign investment. European Union Trade CommissionerPeter Mandelson said in April that Japan is the developed world's "most closed'' market and needs to allow more investment from abroad.
The draft said the government will maintain its goal of balancing the budget by 2011, so that it can start reducing the public debt, which the Organization for Economic Cooperation and Development estimates stands at 182 percent of gross domestic product. To achieve this, the government needs to cut spending or find a way to increase revenue to fund social welfare costs.
Heizo Takenaka, economy minister under former Prime Minister Junichiro Koizumi, said in May that the government should lower corporate taxes by 10 to 15 percentage points to revitalize growth.
Japan's effective corporate tax rate, which includes national and regional corporate taxes, is 40.7 percent, compared with 29.8 percent in Germany, 28 percent in the U.K., and 25 percent in China, according to the Finance Ministry.
A 5 percentage-point cut in Japan's corporate taxes would increase foreign direct investment by 12.7 percent in a year and add about 3.8 trillion yen to the economy over six years, according to Dai-Ichi Life Research Institute.
"Keeping the tax at this high level may prompt Japanese companies to go abroad while also making foreign companies stay away from Japan,'' said Toshiro Nagahama, chief economist at Dai-Ichi Life in Tokyo...
Let us look at some of the claims made:
"Lowering corporate taxes may increase foreign investment"
Do the social scientists at Dai-Ichi Life Institute really believe that Japan fails to attract foreign investment because its corporate tax rate is too high?
Might it not be more of a side issue, as compared to, say:
poison pill defenses,
collusion by domestic companies,
regulations discouraging foreign ownership on national security grounds,
police sweeps against financial misdeeds that strangely always only nab foreign entities and Japanese mavericks,
subsidies to domestic industries,
legalized dilution and
media-hyped up economic xenophobia?
Might these not have a slightly more significant impact on the investment decisions of foreigners than Japan's effective tax rate--whatever that might mean?
It was the discriminatory issues, not the tax rate, that Peter Mandelson was railing against, right?
"Lowering the corporate tax rate will increase growth"
By what mechanism? If the corporations reporting a profit (fools!) are granted an opportunity to pay less in corporate tax, what exactly will they do with this extra money?
- pay their workers a lot more?
- cut the prices they charge to consumers?
- increase their dividends or buy back stock from investors?
- investment in more plant and equipment?
If the corporations do any of the above acts, Takenaka will be right and the lost government revenues will at least make their way right back into the broader economy.
However, the chances of any of the above happening are not particularly high (Is there a profitable Japanese corporation anywhere that is suffering from a lack of cap ex?).
So where will the money go instead?
- Corporate cash hoards
- Propping up unprofitable divisions or unsound expansions
- Reduction of debt
All of which have tended to have a contractionary effect on the broader economy, sucking liquidity and leverage out of the system.
What is infuriating is that the authors fail to highlight the systemic or public policy antecedents of the current corporate tax rate. Instead, in what is a thin veneer of analysis, the authors look at the politics of a corporate tax cut--a subject so self-evident that a log could do it.
"Cut corporate taxes at a time when the ruling party is talking about raising the consumption tax (a measure which, according to this morning's headlines, the PM is having some second thoughts about) and when the elderly are livid at having their pensions docked for medical insurance. Hmmm...might be a tad difficult..."
Financial news has a categorical imperative to promote unbridled capitalism and its tenets, fine. Nevertheless, if a journalist is reporting on the political economy in Japan, he or she really has to know something about the political economy of Japan. Or find someone who does.
Was there anyone not the paid shill of Big Finance whom the authors might have consulted on a matter of public policy -- how the are tradeoffs are achieved and social policy goals might affect choices? You know, like a professor of public policy? Because just asking bankers and econ professors about what in their professional judgment would be best for the sliver of Japan they live in will promote a twisted view of Japanese government policy.
Later - I see that D over at Japan Lost, reading the same story, beat me to the punch on voicing his skepticism of the political feasibility of a corporate tax cut.