Japan Politics December 2017

Japan

Japan: Prime Minister Abe introduces a new tax reform as part of a drive to revive inflation

December 20, 2017

Prime Minister Shinzo Abe made another step in his efforts to stimulate household spending and pull the country definitively out of years of sticky deflationary pressures. On 14 December, the cabinet approved lower taxes for firms that increase investments, productivity and salaries. Businesses that decide not to hike salaries or boost capital expenditure, however, will no longer be eligible for existing deductions. While these measures could bring the corporate tax rate as low as 20%, below the OECD average of around 25%, they will only last three years. Companies argue that higher salaries will represent a permanent shock to their accounts, while the reduction in corporate taxes will be only temporary. This move comes amid plans by other advanced economies, notably the United States, to cut corporate taxes.

The tax reform will slash the corporate tax rate to around 25% if companies hike salaries by more than 3% (1.5% for small and medium-sized businesses) and boost fixed asset investments. Moreover, companies could see the corporate tax rate lowered to 20% if they invest in new technologies that increase productivity. The new tax provisions are expected to take effect in Fiscal Year 2018, starting next April, and run for three fiscal years. The reductions to the corporate tax will be on top of the already approved cut from 29.97% to 29.7%, effective from April 2018. The government considers that there is room for higher salaries and further investments, as Japanese companies hold nearly USD 2 trillion in cash and deposits following years of hefty corporate earnings.

The cabinet also approved measures aimed at boosting revenues as the country is facing a ballooning public debt of well above 200%. The government plans to raise revenues by increasing levies for individuals who earn more than JPY 8.5 million (USD 75,000) per year. The tax reform also includes a JPY 1,000 (USD 8.83) tax on both Japanese citizens and foreigners who leave the country, and higher taxes for tobacco. In total, the government expects to boost revenues by JPY 280 billion (USD 2.5 billion) per year through these measures.

Overall, the plan falls short of a general overhaul of Japan’s tax system and its impact is not yet clear. Firms have expressed skepticism about the success of these reforms in boosting wages, which is Abe’s cornerstone policy to boost consumption and revive inflation. All these reforms are expected to be approved in January, during an ordinary Diet session. They will be implemented gradually, and the cabinet expects further adjustments.


Author: Ricard Torné, Lead Economist

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