On Friday, Prime Minister Abe Shinzo told reporters that his government was laying out the groundwork for an eventual reduction of Japan's effective corporate income tax rate from its current over 35% to under 30% sometime in the near future (Link). Abe and his advisors had proposed an accelerated reduction to under 30% in three years's time. However, the Finance Ministry and the Liberal Democratic Party's tax committee gagged at the inevitable giant shortfall in government revenues. (Link - J)
Abe's announcement has won the approval of the usual suspects. The Nippon Keidanren's new head honcho is thrilled (Link - J). The Sankei Shimbun's editors called the move "indispensable" (Link - J). The reliably underinformed and innumerate William Pesek called it "the centerpiece of the Japanese prime minister's initiative to boost growth." (Link)
Uh huh.
Discussion of lowering the effective corporate tax rate in the media is shallow to the point of malfeasance. Even the reliably lefty and level-headed Tokyo Shimbun, which knows the score as the percentage of Japanese corporations actually paying ANY corporate income tax (under 30% of all corporations, just over 50% of those with base capital of 100 million yen or more - Link J) cannot sponsor an intelligent debate about the subject. (Link - J)
So let's look at some basic facts regarding the rates of corporate income tax companies pay, courtesy the only folks who seem to ask any questions, the Japan Communist Party and its party organ, Akahata ("Red Flag").
Take the above graph, published in Akahata on April 30. Based upon data demanded from the Tax Office by JCP member Sasaki Kensho, it shows that the actual rate of tax paid by Japanese corporations varies widely according to size and is never anywhere near 35% nominal rate. Micro-companies, ones with base capital of 5 million yen or less pay effectively pay about 22%. Small- and medium-sized companies pay anywhere from 23% to 27%, with the peak in the Mittelstand range of companies with 100 million to 500 million yen in base capital.
Above the 100 to 500 million yen range, the actual rate of tax companies pay drops precipitously. Egregiously, companies engaged in consolidated accounting, i.e., all the major corporations who are the names on the walls at the Nippon Keidanren, pay an effective 13% rate of tax.
Source:
http://www.jcp.or.jp/akahata/aik14/2014-04-30/2014043001_01_1.html
What rates of tax are individual companies paying? Here are some numbers, again via the JCP and Akahata.
Toyota Motors 0%
Mitsubishi Corp. 6.2%
Canon 27.8% (a surprise)
Nissan 10.9%
Honda Motors 18%
Komatsu 13.7%
Mitsubishi Land 24.5%
Isuzu 21.3%
Kyocera 13.9%
Source:
http://www.jcp.or.jp/akahata/aik14/2014-06-10/2014061001_01_1.html
Yes, it does look bad that the fabulously profitable Toyota Motors, whose chairman Toyoda Akio is not only a loyal supporter of Prime Minister Abe (Link) but who is the only person under 60 years of age in the directorate of the 2020 Tokyo Olympics (i.e. -- the person who will still be around when the Olympics are held in 6 years's time) pays not one yen in corporate income tax.
So it is the mid-sized companies who are not only paying taxes but who are paying them at a higher rate than anyone else. The big names, the ones with the exceedingly clever accounting departments, are taking advantage of every break they can get.
As for the economic impact of a reduction of the effective tax rate, increasing the retained earnings of corporations while crushing government revenues, I have ranted about the 220 trillion yen (2.2 trillion USD) that Japanese companies already hold in cash and equivalents -- i.e., the Everest of money that is neither invested, paid to the workers and nor returned to the shareholders -- before. (Link)
So what the hell is this talk of reducing the corporate tax rate about? Quietly, if you ask honest members of the LDP, it is about attracting foreign investment from non-Japanese sources. Japan's corporate income tax can be seen as an invisible barrier (oxymoron alert!) against foreign corporations investing in Japan, since these non-Japanese companies tend to be based in countries where investors demand profits -- which puts them a severe disadvantage in competing in Japan against Japanese corporations whose shareholders actually like it when the company books losses -- BECAUSE THEN THE COMPANY PAYS NO TAXES.
Pax vobiscum.
Later - In comments, Jason Mortimer provides an important rejoinder to this post, to which I have offer a short response.
Mr. Mortimer -
ReplyDeleteI am glad that the Toyota Motors is reporting profits, escaping from the horrible cyclical downturn of the Great Recession. I am also pleased that the company is paying taxes again.
The bad performance of Toyota Motors in the March 2009 to March 2014 timespan, with the ensuing tax advantages in terms of loss carryover, does however, not detract from the three main points of my post -- that
1) the vast majority of Japanese corporations do not pay the corporate income tax (fewer than50% of Japan's corporations have paid the CIT since the early 1990s)
2) the companies paying the most taxes are the mid-sized companies
3) when very largest corporations have paid, they have paid vastly less than the headline figure
Now in order to change this scenario over the long-term, you could be arguing that
a) the structural reforms in Abenomics have changed the basic profitability of companies operating in the Japanese economy
b) Japanese corporate governance on its own has shifted to an emphasis on profits, irrespective of the tax disadvantages
c) Japan's accounting laws no longer make the declarations of losses advantageous, from a tax perspective
d) the Japanese government is planning to do away with consolidated accounting, putting mid-sized companies and the very largest companies on the tax same footing
However, none of these is true right now, nor is likely to come to fruition in the near future.
It is true that I do highlight, perhaps unfairly, Toyota Motors for its zero tax payments during the era the DPJ was in power. However, that Japanese corporations should be asking for a tax cut after years of underpaying or not paying due to the Great Recession -- i.e., afer essentially receiving a multi-year subsidy from the citizens who have to make up the difference of the lost government revenues -- should be galling.