A cut in the corporate tax rate is urgently needed if the nation wants to strengthen the competitiveness of Japanese corporations, thereby halting the hollowing-out of its industries. Presenting specific measures is essential to turn the wheels of both economic rejuvenation and fiscal reconstruction.

The government’s discussion of whether the nation should lower the effective rate of the corporate tax as the centerpiece of its next growth strategy has entered its final phase.

“I’d like you to show directions for reforming the corporate taxation to be growth-oriented,” Prime Minister Shinzo Abe told the Council on Economic and Fiscal Policy, instructing it to clearly stipulate a cut in the rate in the Basic Policies for Economic and Fiscal Management and Reform, which will be announced in June.

The effective corporate tax rate stands at 35.64 percent in Tokyo, a rate higher than is seen in many European and Asian nations, whose corresponding tax rates are in the 20 percent range.

In a speech made in Britain early this month, the prime minister stressed he was concentrating on bringing investment and human resources to Japan. He apparently pins high hopes on the favorable effects a cut in the effective corporate tax rate would bring in attracting foreign investment to this country, which would be a shot in the arm for economic growth.

Akira Amari, state minister in charge of economic and fiscal policy, has said he wants to lower the effective rate into the 20 percent range in five years or so. A council member from the private sector called for reducing it below the 30 percent mark in a few years and eventually to 25 percent.

It is understandable for the government to want to inform the world of its intention to drastically lower the rate by incorporating the cut in its basic policies, which will inevitably attract wide attention from the markets.

Alternative source needed

At stake, however, is how to secure an alternative revenue source. It is said that lowering the effective rate to below the 30 percent mark will require an alternative source of about ¥3 trillion.

However, some quarters of the government and the business sector argue that revenues from the corporate tax itself will be higher than the original forecast as the economy moves onto a steady path toward recovery.

But tax revenues are at the mercy of economic fluctuations. Using increased revenues from the corporate tax could be one option, but it is problematic to carry out a tax reduction by relying on projected natural increases in revenue from the corporate tax.

A draft on corporate taxation reform announced Friday by the government’s Tax Commission gives approval to a tax cut before finding alternative sources to fill the shortfall, saying it is not necessary to keep the same level of tax revenues for every single fiscal year. However, it added that it is an invariable principle to have a permanent tax revenue source as long as there is a permanent tax reduction.

Japan’s fiscal health is critically deteriorating. It is appropriate for the commission to underscore the importance of securing necessary revenue sources in several years when jump-starting a tax cut in view of economic growth.

As about 70 percent of domestic companies do not pay corporate taxes at all, it is indispensable to expand the taxation base to ask more companies to shoulder a small amount of tax burdens.

Special taxation measures that have provided tax breaks for certain industries should be abolished or scaled down if they are deemed no longer effective in terms of policy implementation. It also merits consideration to expand the size-based business tax, which levies tax in accordance with the scale of a business regardless of the deficits many of them are running.

The government should come up with a realistic taxation plan that would help secure a certain level of revenue sources.