TOKYO -- A 10-percentage-point reduction to Japan's effective corporate tax rate would add 50 trillion yen ($488 billion) to real gross domestic product in 2030, enabling stronger growth by attracting foreign capital and workers, according to estimates by the Japan Center for Economic Research.
The country's effective corporate tax rate now stands at about 35%. The think tank's calculations assume that it would be lowered 5 points in 2015 and 2020 to bring it to 25%, in line with other major Asian countries.
Leaving current tax rates in place would result in average annual growth of 0.9%, resulting in a GDP of only 619 trillion yen in 2030. A lower tax rate would boost growth to 1.4% and GDP to 669 trillion yen.
Data for major industrialized nations indicates that a country's degree of openness to investment and workers from overseas is closely correlated with economic productivity. If Japan further opens its doors by cutting corporate taxes, and foreign investment increases as a result, productivity will improve.
The think tank looked at the degree of correlation between corporate tax rates and productivity to calculate the GDP boost provided by a tax cut.
On the other hand, a 10-point tax cut would reduce annual corporate tax revenues by 5 trillion yen. To maintain fiscal discipline, the center recommends that the consumption tax be raised to 12% to make up the difference.
Such an increase would hamper growth to a degree. But with a 25% corporate tax rate, even if the sales tax is hiked to 12%, GDP would still come to 664 trillion yen in 2030. While this is slightly less than when implementing the corporate tax cut alone, it is a marked improvement over leaving both rates the same.
Raising the sales tax to 19% under the same conditions would bring GDP to 647 trillion yen -- still better than if taxes were left alone. This rate would allow Japan to cover the full cost of its social security programs without relying on borrowing from around 2025 on, as well as stabilize national and local debt at around 200% of GDP, according to the think tank.
The government and ruling coalition are considering paying for a corporate tax cut by expanding the tax base, taking such steps as reworking the current system of special tax breaks that favor certain industries.