AMPONTAN

Japan from the inside out

Let’s make a deal

Posted by ampontan on Tuesday, September 7, 2010

Many (on the left) are correct when they bemoan the collusion of government and corporations. They even have a point when they decry special deals for Halliburton or Archer Daniels Midland as proof of creeping fascism. What they misunderstand completely is that this is the system they set up. This is the system they want. This is the system they mobilize and march for…The fascist bargain goes something like this. The state says to the industrialist, “You may stay in business and you may own your factories. In the spirit of cooperation of amity, we will even guarantee you profits and a lack of serious competition. In exchange, we expect you to agree with—and help implement—our political agenda.” The moral and economic content of the agenda depends on the nature of the regime.
– Jonah Goldberg

KEIDANREN (The Japan Business Federation) last week restated the conditions of a deal initially offered by Kan Naoto’s government when it assumed office, according to this report in the Daily Yomiuri. Here are the terms: Keidanren wants the government to cut the corporate tax rate from 40% to 30% “as quickly as possible”. The nominal 40% rate is the world’s highest, and the country’s largest lobbying group for big business says that rate will force companies to relocate overseas. In return, they’ll support the government/Finance Ministry objective of boosting the consumption tax to 10% in 2% increments.

As part of the deal, Keidanren is also trying to nip in the bud the introduction of an “environmental tax”, a euphemism for a carbon tax.

They’re just following up on a nearly identical proposal from Mr. Kan shortly after he took office in June. That deal offered an even sweeter corporate tax cut:

The government pledged in its medium-term economic plan today to bring the corporate tax rate down to a level “commensurate” with other leading nations. That rate is “about 25 percent,” Yosuke Kondo, parliamentary secretary for the Trade Ministry, said in an embargoed briefing yesterday. Firms in Tokyo pay a levy, including local taxes, of 40.7 percent.

Parliamentary secretary for the Trade Ministry = Kasumigaseki’s mouthpiece. In other words, the Kan Cabinet = The newest messenger boys for the Japanese dirigistes. There you have a glimpse of one of several reasons reformers discounted Mr. Kan’s administration before the new ministers hung up the scrolls on their office walls.

But there’s a lot more to this story that few people talk about—such as how Big Business makes money off the consumption tax, and which of the Keidanren members actually pay the 40% corporate rate. One of those who did bring up the other parts of the story was the weekly Shukan Post in a 9 July article. Here’s a summary in English.

*****
The first order of business for the Kan Cabinet was to strike a deal with Keidanren, with whom relations had deteriorated during the Hatoyama administration. On 8 June, the day the Cabinet was inaugurated, DPJ Secretary-General Edano Yukio paid a courtesy call on the organization.

Ten days later, three leaders of the organization, including Chairman Yonekura Hiromasa, visited the Kantei and offered their support for an increase to 10% in the consumption tax: “(The tax) should be increased, considering (the need for) social welfare and fiscal restructuring. This has encouraged the business community.”

Those business and financial leaders should know full well that a consumption tax increase to 10% will harm the economy. They welcome the increase because it’s a scheme that allows them to show a clear profit through the “Export Return Tax”.

Ordinarily, companies pay consumption tax in a formula determined by subtracting the amount equal to 5% of their purchases from an amount equal to 5% of their sales. To avoid double taxation due to the application of overseas value-added taxes or other charges, exports are exempted from consumption tax. The consumption tax is levied for procurements, however, so this is a mechanism to refund that portion to exporters.

Certified tax accountant and former Kanto Gakuin University Prof. Koto Kyoji explains:

“It’s called a refund, but it’s not a refund of money that the large exporting companies pay to the National Tax Agency. The subcontractors are the ones paying the taxes, but only the big companies profit from the refunds. It is a de facto tax break for big business.”

Most of the core Keidanren companies have a high export ratio, so they receive an enormous amount in refunds. A group of tax experts, including Prof. Koto, performed a trial calculation based on corporate financial reports as of March 2007. Ten of the country’s biggest companies, including manufacturers of automobiles and electric machinery, alone received roughly JPY one trillion in refunds that year.

History shows that while big business will profit from the consumption tax increase, the burden will weaken the SMBEs that support the big businesses. The consumption tax was raised from 3% to 5% in April 1997. The amount of delinquent taxes the following year totaled roughly JPY 725.0 billion, a 34% year-on-year increase. According to Prof. Koto, the amount of the consumption tax exemption for all companies was lowered from JPY 30 million to JPY 10 million with the amendment of the tax code in 1993. The number of delinquencies continued to rise.

“According to Japanese business practices, the parent companies have the right to set prices, so in most cases the suppliers, subcontractors, and other subsidiaries have the consumption tax portion discounted. Ordinarily, the consumption tax increase would be passed along in the price, but the large companies, who are the prime contractor, won’t allow that, which cuts sharply into profits. In contrast, the big companies pocket the consumption tax portion that is the liability of the subcontractors in the form of a refund. The real nature of the consumption tax increase is that the general public and the SMBEs will be battered, while only the big companies get preferential treatment.”

Corporate tax

The same captains of business and industry who are on board for an increase in the consumption tax are also petitioning the government for a reduction in the corporate tax. Keidanren’s position has long been that lowering the corporation tax, which is high by international standards, is necessary to overcome deflation. They claim that corporations will move overseas otherwise.

Prime Minister Kan said in a debate during the previous DPJ presidential election that he would give consideration to lowering the corporate tax.

But is it true that the Japanese corporate tax rate is all that high? According to Finance Ministry data, the effective tax rate for corporations in Japan is 40%. It is roughly the same in the United States, but 33% in France, 28% in Great Britain, and 25% in China.

Prof. Koto, however, says these figures are a sham (Emphasis mine).

“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. Considering these hidden tax reductions, the Japanese corporate tax is not that high at all.”

Keidanren established categories of preferential categories as standards for evaluating the political parties to which they’ll donate money. The members determine the amount of their contributions. In 2008, at the end of the LDP/New Komeito coalition government, contributions to the LDP from Keidanren members totaled about JPY 2.7 billion, while those to the DPJ totaled about JPY 100 million. The LDP became the “running dog” of business interests to receive their contributions, so the tax reductions in the form of special measures were established for big business with the special measures…

The Kan Cabinet quickly embraced the idea of a consumption tax increase, though the DPJ party ran on a platform in the lower house election of freezing that tax for four years. It abandoned the policy of criticizing the LDP’s system of cutting sweet deals for tax policy and is attempting to replace the LDP as the ones who cut those deals.

Says Prof. Urano Hiroaki of Rissho University:

“The DPJ was opposed to the LDP/New Komeito plan for lowering the corporate tax. The people also surely expected them to keep Mr. Hatoyama’s pledge of freezing the consumption tax for four years. But the party has now replaced him with Prime Minister Kan, who has fallen in line with the objectives of the bureaucracy and business and financial leaders. He’s returned to the track laid down by the LDP/New Komeito. The voters must be wondering why they voted for a change in government.”

There’s plenty of room for discussing a reduction in the corporate tax rate. That discussion should be held after the Iron Triangle of the government, the bureaucracy, and big business is broken.

(End summary)

*****
Meanwhile, Forbes magazine last week released its annual list of the top 200 small and medium sized companies in Asia:

Only two Japanese firms made it onto Forbes magazine’s list Thursday of Asia’s 200 top small and medium companies. The number of Japanese firms dwindled from 24 last year according to Forbes latest annual “Best Under a Billion” list that picks 200 firms from 13,000 listed Asia-Pacific companies with sales below $1 billion.

The reason for the drop?

“Japan, which produced 24 entries last year, has only two companies represented this year because of domestic economic woes,” Forbes said.

However:

There are also 20 South Korean firms, down from 23 last year, and 19 Taiwanese firms, up from 16 last year…There are also fewer Japanese firms on the list than those from Southeast Asian countries such as Malaysia, Thailand, Singapore and the Philippines. Countries other than Japan with two firms on the list are Sri Lanka and Pakistan.

Here’s a list of the Keidanren officers showing the companies at which they are employed.

And here’s another passage from Jonah Goldberg. He’s writing about the United States, but it’s applicable here, too:

This is the hidden history of big business from the railroads of the nineteenth century…to the outrageous “Big Tobacco” cartel today: supposedly right-wing corporations work hand in glove with progressive politicians and bureaucrats in both parties to exclude small businesses, limit competition, ensure market share and prices, and generally work as government by proxy.

Now try the quote at the top of the post one more time.

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2 Responses to “Let’s make a deal”

  1. I basically agree with the quote at the beginning. I think people are beginning to realize that politics to a large degree has been about “sending the right message” instead of actually working in everyone’s interest. However, I think the Right is just as much guilty of “corporatism”. No political party that refuses to play ball is going to rise to power.

    I think the carbon tax would be a good alternative to cap and trade, but shouldn’t be combined with it by any means.

  2. Roual Deetlefs said

    Good article. You’re like a mythical Cassandra in Japan’s current climate. Lets hope your warnings are heeded.

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