Seemingly in response to the Trump administration’s announcement on cutting the corporate tax rate to 20%, a plan to significantly reduce the effective corporate tax rate has surfaced within the Japanese government. In order to attract foreign companies and keep domestic businesses at home, many nations in the world have reduced their corporate tax rates. Japan, too, has gradually cut its tax rate. However, the benefits of the tax cut have only ended up increasing companies’ internal reserves. Some experts voice skepticism as to whether the corporate tax cut will contribute to economic expansion.
Corporate tax rate reductions, which are aimed at prompting companies to increase their investment and raise employees’ wages, and consumption tax hikes, which supplement the reduction in tax revenues, are worldwide trends. The UK, which has decided to leave the EU, plans to cut its present 19% corporate tax rate to 17% in 2020. The second Abe administration had reduced the corporate tax rate from 37% at the time of its inauguration to 29.97% by fiscal 2016. The administration plans to further cut the rate to 29.74% by fiscal 2018.
In order to promote its new signature policies of carrying out a “human resources development revolution” and a “productivity revolution,” the Abe administration intends to offer tax cuts to companies that actively promoting investment in human resources, capital investment, and wage hikes. In addition to this tax cut policy, the government is seeking ways to reduce the effective corporate tax rate to around 25% so that a wide variety of businesses can benefit from the effects of the tax cut.
The Abe administration has been aiming to realize a virtuous circle in which companies utilize the benefits of corporate tax cuts for capital investment and wage hikes, eventually leading to economic expansion and increased consumer spending. However, companies’ internal reserves exceeded 400 trillion yen for the first time in fiscal 2016. Out of the added value produced by businesses, the “labor share,” which indicates the proportion of added value used for personnel expenses such as wages, was 43.5% from April through June 2017 for major companies, marking the lowest level in 46 years. This clearly shows that the benefits of corporate tax cut did not lead to increased wage hikes.
The government and the ruling parties are now considering introducing an “internal reserves tax” by which the administration can impose a tax on companies that do not utilize a certain amount of their profits for wage increases and capital investment. “One idea is to give favorable treatment to companies that actively utilize internal reserves,” said Finance Minister Taro Aso at a press conference held on Sept. 26. “It’s worth considering.” As such, it appears likely that the government will actively look into the idea.