The government has decided to incorporate a planned reduction in the effective corporate tax rate, to below 30 percent at an early date, into the Basic Policies for Economic and Fiscal Management and Structural Reform that will be drawn up in late June, according to government sources.

The government’s corporate tax reduction plan is to be a centerpiece of the “third arrow” in Prime Minister Shinzo Abe’s economic policy.

Effective corporate tax, which is currently about 35 percent, is a combination of national and local tax payments on the taxable income of companies.

Akira Amari, state minister for economic and fiscal policy, has also said it is favorable to cut the corporate tax rate to the twenties, lowering by a total of about 5 percentage points.

The government plans to cut the rate about 2 percentage points in fiscal 2015, and then to decrease the rate in stages to below 30 percent, the sources said.

The government will entrust the tax commissions of the Liberal Democratic Party and New Komeito with accurate figures for the rates to be cut, and bring discussion to a conclusion when it amends tax revisions for fiscal 2015 at the end of this year.

The Finance Ministry, among others, takes a cautious stance regarding significant corporate tax rate reductions, claiming that tax revenues are expected to fall by about ¥470 billion for even a 1 percentage point corporate tax reduction.

However, they are expected to accept the tax reduction if the government is able to find another revenue source to cover the loss, since Abe is positive about reducing the corporate tax rate.

Thus the government plans to stipulate in the “basic policies” that the government will secure the necessary revenue sources.

The government hopes that the cut to the effective corporate tax rate will facilitate entry by foreign companies into the domestic market, alleviate the burden on domestic firms, expand employment and raise the wages of employees.

However, the tax cut does not always provide benefits to a broad range of firms, as loss-making companies are basically exempt from corporate tax. Thus some observers have questioned whether the tax cut policy can produce positive effects on the nation’s economy.

The nation’s effective corporate tax rate of 34.62 percent (35.64 percent in Tokyo) is high compared to those of foreign countries.

The effective corporate tax rate is 33.3 percent in France and 29.59 percent in Germany.