May 7, 2014 7:00 pm JST

Abe puts all chips in corporate tax cut gamble

TOKYO -- Japan raised its sales tax about five weeks ago, and the effects of this on the economy have so far been limited. But Prime Minister Shinzo Abe is still looking to include bold economic stimulus measures in the government's basic policies for economic and fiscal management and reform, which will come out in June.

     A centerpiece of Abe's new growth strategy is a lowering of effective corporate tax rates. The government might include descriptions of a staged reduction in corporate taxes in its June report. Akira Amari, the economy minister, indicated Monday that the government should unveil in these June policies exactly how far the tax will be lowered and when this will start.

     Discussions over this is expected to pick up within the ruling Liberal Democratic Party starting this week. Despite Abe's efforts to reduce corporate taxes, the LDP's tax panel is still cautious.

Factional splits

On April 16, Abe met with Takeshi Noda, chairman of the LDP's tax panel, Masahiro Komura, adviser to the tax panel, and Fukushiro Nukaga, head of a subcommittee of the tax panel.

     The three were at the Prime Minister's Office as executives of Japan-China Friendship Parliamentarians' Union and other organizations, ostensibly to talk about diplomatic activities by legislators. The prime minister asked these three to advise him. The assumption is that the advice pertains to corporate tax reductions, as the three men double as key executives on the LDP's tax panel.

     Noda recently noted that he has been quite cooperative with Abe's growth strategy. This comment is being interpreted as an indirect warning that Abe will not have an easy time getting corporate taxes lowered.

      In Tokyo, the current effective corporate tax rate is 35.64%. In most other Asian countries, it is 25%-30%. The opinion of many experts is that Japan needs to reduce its corporate tax rate by about 8 percentage points to stay competitive with the rest of Asia.

     It is estimated that every 1-percentage-point reduction in the tax rate will require 450 billion yen ($4.38 billion) in alternative revenue sources. An 8-percentage-point reduction translates to more than 3 trillion yen in lost government revenue.

     Cutting depreciation allowances and reducing tax incentives aimed at spurring research and development are seen as possible ways to shore up government revenues. Other candidates include scaling down or putting an end to special tax privileges, which indicate special tax cuts for each industry. The government can also hope that economic growth will help cover revenue shortfalls.

     The LDP's tax panel has been arguing that the government should clarify these revenue sources. But it does not mean that the tax panel has given the green light to new revenue sources.

     The tax panel has built up its clout through years of dealing with policy-oriented tax cuts and special taxes. Last December, the panel put off a full-scale debate on corporate tax cuts in the tax reform plan for fiscal 2014. Soon after this decision, Abe started making positive comments for slashing corporate taxes.

    Abe appears ready to take on the panel ahead of discussions over tax reform for fiscal 2015. In London on May 1, Abe said he would further work on corporate tax reform, citing globalization and the need for more investment in Japan.

Talks coming

At a session of the Council on Economic and Fiscal Policy held March 19, Chief Cabinet Secretary Yoshihide Suga said the prime minister is determined to lower corporate taxes. Suga urged discussions on how far the tax should be lowered and the schedule for implementation, on the condition that the tax rates should be lowered starting next fiscal year. Some LDP members are already responding to Suga's nudging.

     At the April 24 subcommittee meeting of the tax panel, about 30 mid-ranked junior LDP members insisted that the government cut corporate taxes as soon as it possible. They say that corporate tax cuts are crucial to enhance the international competitiveness of Japanese companies. Noda, Nukaga and other executives of the tax panel sat through the two-hour meeting, showing little to no emotion throughout.

     The discussion was led by members of a group studying the long-term tax system. The group was formed the day before. A key member, Keisuke Suzuki, was elected to the lower house of the Diet from Kanagawa Prefecture, which is also Suga's prefecture. Another key member, Masahiko Shibayama, is close to both Abe and Suga.

     In March, Suga brought Heizo Takenaka and some members of the study group, including Shibayama, together at a hotel near the Diet. Takenaka is a former minister of economics and a member of Abe's Industrial Competitiveness Council. Takenaka reportedly said that a reduction in corporate taxes would revolutionize the country's growth. He cited Abe's speech made in January at the annual meeting of the World Economic Forum in Davos, Switzerland: "We must also make the tax system for companies internationally competitive."

Final stretch

Abe is expected by this summer to reshuffle his cabinet and make new party executive appointments. The path to corporate tax reductions will most likely be determined by how many members of the Nukaga faction, and those loyal to another tax panel adviser, Nobutaka Machimura, receive cabinet or party executive posts.

      Noda must keep his current position if he is to be involved discussions over tax reform plans for fiscal 2015, which are due out in December. Appointments to the LDP's tax panel are essentially Abe's to decide. An official close to Abe warned that members who do not listen to what the prime minister says could be replaced.

(Nikkei)