Posted by ampontan on Friday, December 17, 2010
THE NEWSPAPERS in Japan this week were filled with stories about the Kan Cabinet’s proposed cut of the corporate tax rate. Japanese blogger Fujisawa Kazuki asks: What tax cut? Here’s the English version of what he wrote.
The Tax Commission announced different measures for tax increases to offset the decline in tax revenue due to the reduction of the corporate tax rate that so many in industry and the commentariat have been pushing for. As widely predicted, the reduction in the exemptions for the income tax and the residential tax will mean a de facto increase of taxes on higher earners (defined as those making at least JPY 15 million [roughly $US 178,000] a year). There will also be a tax increase for individuals through the revision of the taxation system for dependent family members. Yet another increase will involve the broadening of the amount of assets subject to inheritance taxes.
The current corporate tax rate will be reduced by 5 percentage points from 40% to 35%. Concerns had been raised about the taxes on securities investments. It was decided to extend for two more years the preferential 10% tax rate on capital gains and dividends. To offset the corporate tax reduction, there will be another de facto increase in corporate taxes through modifications of the rules for depreciation and the (reduced deductions) for the carryover of losses. Moving to implement these measures will require legislative proposals to amend the tax code in the next regular session of the Diet. In short, there will likely be increases in every category of taxation other than the corporate tax.
I think a nation’s tax code shapes the nation itself, and that’s why I’m so amazed–or rather, extremely discouraged–at the Tax Commission’s measures. Other than a mere five percentage-point reduction in the nominal corporate tax rate, this is a fundamental, across-the-board increase in taxes. No philosophical justification of any kind can be discerned behind these increases; it is the result merely of the collision between the shameless populism of the politicians and the equally shameless attempt of the bureaucrats to save their own skins.
How did this (bad) proposal to amend the tax code come about? It’s very easy to understand what’s behind it. The politicians do not want to lose the next election, so they do not want to raise taxes. In particular, they must not raise the consumption tax. Also, they are being forced to lower the corporate tax rate amidst the global competition to cut corporate taxes. This has already been widely discussed in the mass media. Consequently, it has been decided through “political leadership” that the consumption tax will not be raised for now, and the corporate tax rate will be lowered to a certain extent.
The bureaucrats, of course, want to increase taxes to expand their power. The issue that comes before power, however, is the absolute inability to spend money one doesn’t have to begin with. It will be next to impossible to float deficit-financing bonds with the two houses of the Diet in gridlock. That would result in a sovereign default compounded by the politicians’ populism. Sovereign default would be extremely troubling for public employees, such as the bureaucrats, so they must find some way to avoid it.
What happened as a result? It is a host of under-the-radar tax increases of which the people are unaware. The Financial Ministry bureaucrats have racked their brains to devise ways to raise taxes by stealth while operating under the constraints of maintaining the consumption tax rate and lowering the corporate tax rate. The cut in dorporate taxes is offset to a certain extent by the tax increases resulting from the revisions of the rules for depreciation and carrying forward losses. Taxes will be increased further by the subtle changes to the tax code for income tax and the residential tax. The visible tax rates will not change in either case, so the tax increases will likely pass by the citizens without notice.
Ultimately, there is absolutely no philosophy about how to create growth for Japan or what sort of country they want Japan to be. The Japanese economy is stagnant, which by itself has caused a decline in Japanese global competitiveness. Yet when it comes to the tax code, the most important element for determining the course of the nation, all we have is the selfish ego battles of the ugly politicians and bureaucrats.
Why do they show no vision to simplify the tax code and thereby revive the Japanese economy? It would not be difficult at all. Go to any bookstore and pay about JPY 1,000 and you’ll find out. (N.B.: There’s a link in the original to a book called Nihon Keizai Yomei Sannen [Three Years Left for the Japanese Economy], by Takenaka Heizo, Ikeda Nobuo, Suzuki Wataru, and Doi Takero) Both the corporate tax and the income tax must be set at levels equivalent to those in other Asian countries. Both the corporate tax and the income tax must have flat rates below 20%. A tax code must be created that rewards the people who work hard. The corporate tax will be reduced to improve international competitiveness, but unless the income tax of the managers working at those corporations is also lowered, there won’t be any way to attract foreign-capitalized companies. In the aged society of the future, funding sources must be sought through the consumption tax to insure the equal liability of the elderly, who have a disproportionately higher amount of assets.
This proposed amendment of the tax code has none of these justifiable changes whatsoever. It is only a halfway measure to protect the mutual interests of the politicians and the bureaucracy. It is truly pathetic.
Neither the government nor the bureaucrats seem to be interested in real economic growth, do they? And did you notice that the floor for what constitutes the well-off is lower in Japan than in the United States?
It’s time again to quote Prof. Koto Kyoji on the corporate tax rate, since no one else has:
The effective tax rate as stated by the Finance Ministry bureaucrats and the business leaders is nothing more than the superficial rate that does not reflect the deductions from special tax measures. Calculating the effective tax rate that incorporates the special tax measures for reducing taxes by avoiding them altogether shows that the average rate for the top 100 companies ranked by current profit is 30%. It is 32% for the large auto companies, 15% for the telecommunications companies, and 8-9% for the trading companies. There are many provisions for revenue exemptions when calculating the corporate tax, and all of them benefit big business.
One recommendation made to the Cabinet was to eliminate or reduce the family deduction for non-working housewives, with the assumed revenue increase earmarked to pay for additional child allowance payments. They also clearly stated they want to use this measure to get women out of the house and into the workforce. The DPJ itself wouldn’t go for it, however. That will likely change after the regional elections conducted nationwide next spring. There’s already talk of a proposal to increase the consumption tax during the fall Diet session next year.
Enemies of the people
A senior official of the Social Democratic Party is opposed to the reduction of the corporate tax rate. He said the companies would only allocate the savings to internal reserves.
Why anyone in the Social Democratic Party would have the first idea about corporate financial behavior, or why he thought it was the business of the political class to dictate to corporations the disposition of their legally acquired income, he did not say.
Tuesday, Prime Minister Kan met with Keidanren head Yonekura Hiroaki and asked that the group’s members start hiring more and boosting capital investments in return for the 5% reduction in the corporate tax rate.
It’s progress, I suppose. At least Mr. Kan has begun to understand there’s a connection between capital investment and economic growth. He also didn’t try to convince anyone that tax increases lead to economic growth, which was his line of a few months ago.
The dinosaur media
The Japanese mass media generally did not care for the proposal because there is no provision for an increase in the consumption tax. As we’ve seen before in this post about Hasegawa Yukihiro, Big Media in Japan often takes its cues from the Finance Ministry.
Missing in action: Calls for serious cuts on the fiscal side.
One of the objectives of this website is to show that it is counterproductive for the person with an interest in Japanese affairs to read the coverage or commentary from the English-language media.
Indeed, it is often the intellectual equivalent of watching someone walk into a five-star Michelin restaurant, tuck a napkin into his collar, eat with his hands, and chew with his mouth open.
Those inclined to dismiss that as an exaggeration are invited to read this piece of glorious ignorance by someone named Paul Jackson at a site called The Diplomat:
Earlier this week, Prime Minister Naoto Kan ordered a 5 percent cut (sic) in the corporate tax rate as had been widely anticipated…But after all the huffing and puffing by Kan about the need for fiscal discipline, how can he justify increasing the hole in the government’s finances by another 1.5 trillion yen? Surely that flies in the face of his backpedaling on his party’s general election manifesto commitments in the name of budget-balancing prudence?… So let’s keep a close eye on how Kan’s government is going to find the cash to fund this cut.
Maybe he could start by keeping a close eye on this.
And hubba-hubba, how about that writing style? Prime ministers don’t “order” anything, the proposal is for a five-percentage-point cut, not a 5% cut, and it’s a shame there’s no YouTube of something flying in Mr. Kan’s face while he’s backpedaling.
Let’s just hope he doesn’t pick his teeth and belch out loud before leaving the restaurant.
UPDATE: Nakagawa Hidenao of the LDP notes that the stealth “revenue enhancements” were obviously devised by the Finance Ministry’s Budget Bureau. He points out that when the DPJ was in opposition, they criticized the Liberal Democrats for piggy-backing on the bureaucracy and campaigned on a platform of instituting political control of the bureaucracy, but says that they have become even worse than the LDP. He also notes the farce of the Ren Ho-led policy reviews, which have no legal standing and whose recommendations have been vetoed by the DPJ labor union supporters.
Declare the pennies on your eyes…