politics

In corporate tax reform, Abenomics giveth, and taketh away

19 Comments
By Tetsushi Kajimoto and Shinichi Saoshiro

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19 Comments
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I find this article is quite poorly written and must be confusing for many people. It fails to properly distinguish between genuine corporate tax (the percentage charged on profits) and the fixed yearly per capita amount of local city residence tax that each corporation is required to pay regardless of how much they make. The per capita charge is quite unique to Japan and it really shouldn't be called corporate tax.

If the corporate tax is imposed on loss-making firms, that would bring about a realignment of businesses and...

After reading this most people will reasonably ask: 'How can we tax a loss making firm? Don't we only tax profits?'. They would be correct, but again, what the quote is refering to is the per capita local residence tax, not the percentage charge on profits.

4 ( +5 / -1 )

Toyota, the biggest car maker in the world payees no tax, nothing. The tax system is useless. I pay tax and I am pretty sure I'm not the biggest car maker in the world. Two things have to happen, government need to collect tax from all profit making companies and the government needs to cut costs. Obviously vested interests will block this.

4 ( +4 / -0 )

“Corporate tax cuts and broadening the tax base would make Japan’s taxation fairer and more stable, even though it would impose a burden on unprofitable companies that are not paying corporate tax, many of which are small and unlisted,” said Hiroshi Watanabe, senior economist at SMBC Nikko Securities.

This topic is far out of my league but I am interested to know what percentage of the workforce in Japan are employed by these small and unlisted firms and did the government even do an assessment of what these changes ultimately might mean in terms of lost employment and/or benefits. Does Japan use a progressive corporate taxation rate and if so wouldn't it be fairer to first collect tax on companies like Toyota that are profitable and taking advantage of the system and still at the same time make considerations for companies that aren't but are sustainable for the sake of their substantial workforce who also contribute to the national and local coffers through such taxes as salary and sales/consumption?

It seems that “Abenomics” is being directly drafted by Keidanren (Japan Business Federation) and little or no consideration is being given to the workforce who will bare the brunt of the pain when these changes come into effect. Some might argue that Abenomics is not entirely being supported by Keidanren but that could be theatrics as if changes are being forced upon them and there will be pain why not decide for themself what those changes are going to be.

4 ( +4 / -0 )

“Corporate tax cuts and broadening the tax base would make Japan’s taxation fairer and more stable, even though it would impose a burden on unprofitable companies that are not paying corporate tax, many of which are small and unlisted,” said Hiroshi Watanabe, senior economist at SMBC Nikko Securities.

So, once again, Japan Inc. wins and the little guy's/entrepreneurs lose. Shame.

1 ( +3 / -2 )

Some of these reforms are actually a huge step backwards.

Without getting too technical, the unique way in which corporations are taxed locally in Japan actually discourages people from starting small companies. They removed capital requirements in 2006 but they never addressed the local tax problem.

If you decide to form a small company in Japan, you will be stung with at least a 50,000 yen tax bill from your local city at the end of the year even if your company isn't making a big profit (this is the per capita local resident tax for corporations and could be millions of yen if your company has more capital). Part of the reforms will increase this per capita charge that must be paid whether you are profitable or not, and it seems that they will use that money lower actual corporation tax percentage rates for other companies.

They are in effect taking money from unsuccessful companies and handing it to successful companies! It doesn't strike me as a great plan for small business investment and competition.

2 ( +3 / -1 )

Cutting the tax rate below 30% would cost some 2.8 trillion yen in terms of lost revenue.

This should be paid for by cutting some expenditure. Japan is spending circa 40 trillion yen beyond it's means, almost twice tax revenues, so they should start by taking 5 trillion yen off spending by some across the board cuts, if they can't think of a better way to do it. Raise the pension age perhaps would be a start.

M3M3M3,

Thanks for the useful explanation.

Mr. Perfect,

We have to remember that Japan's economy has been stagnant for 2 decades. Things have to change for a brighter future, and short term pain may be necessary. That's the way it is with reforms.

wouldn't it be fairer to first collect tax on companies like Toyota that are profitable and taking advantage of the system and still at the same time make considerations for companies that aren't but are sustainable

Toyota is (IIRC) Japan's biggest company in terms of market capitalisation, and it's existence is the reason probably a million Japanese people have jobs at all. (What would Nagoya be without Toyota?) Japan needs more Toyotas. Toyota shouldn't be looked upon as a cash cow to be milked, but as a goose which lays golden eggs.

Companies that aren't profitable shouldn't be favoured or pampered. Non-performing companies disolving would free up extra labour and make for some rejuvenation in Japan's stagnant economy. It is a nice idea to think that everyone can have a job forever, but this idillic happy-world thinking breeds complacency and doesn't do much to nurture innovation and progress. New businesses replacing the old ones would be far more valuable to society if they actually make money, enabling them to pay their workers better wages.

little or no consideration is being given to the workforce who will bare the brunt of the pain when these changes come into effect.

Japan's economy needs a rethink though. Japan's economy won't be better off for plodding away as it has been without change and innovation in another 10 or 20 years down the track.

Japan used to have globally dominant companies, big names. Today there's a lot of deadwood. Flushing it out and starting afresh will allow the educated Japanese workforce a chance to shine once again. Better to make these changes now while Japan is 3rd largest economy in the world, rather than the 10th or 20th largest sometime in the future.

0 ( +1 / -1 )

“If the government continues to levy high tax on profitable firms, that would drive more firms out of Japan.”

Are you serious? We can't tax the people making money because they might run away? How about creating an economy where they could justify staying in Japan, tax has nothing to do with it.

0 ( +1 / -1 )

gogogo,

Are you serious? We can't tax the people making money because they might run away? How about creating an economy where they could justify staying in Japan, tax has nothing to do with it.

Tax isn't the only factor, but I don't think anyone can deny that it isn't one of the various elements that make up a business environment.

Personally I like what I see in this tax proposal. It's good that the government is looking to do away with measures that perpetuate under-performance.

But tax reform by itself isn't enough. Abe's team needs to produce a broader set of reforms so that, as M3M3M3 notes, new businesses can get started. The Abenomics 3rd arrow need not be so complicated: just get government out of the way, simplify things, allowing more freedom for people with ideas for a business. It doesn't take a bunch of Tokyo University grads to decide everything for everyone.

0 ( +1 / -1 )

Dumb move. The corporates don't need the cut as they earned record profits and accumulated tons of cash at the old higher rate anyway. In addition, the govt will be broadening the tax base in the future to make up for the shortfall, meaning we will all have less purchasing power.

That means we all must sacrifice so that wealthy corporations can become even wealthier. Even so, as we consume less, the economy could slow down again, and and so yes, less corporate profits!

-3 ( +0 / -3 )

Funny. I only noticed the taking part.

1 ( +1 / -0 )

JeffLee,

Dumb move. The corporates don't need the cut as they earned record profits and accumulated tons of cash at the old higher rate anyway.

Please enlighten me - if Japanese corporates have had it so good then why is Japan's stock market nowhere near making all time highs, while ex-Japan stocks globally have been making record highs with regularity in recent times?

In addition, the govt will be broadening the tax base in the future to make up for the shortfall, meaning we will all have less purchasing power.

What makes you think they won't just have the BOJ buy more bonds? They already spend twice as much as tax revenue - what's another 2 trillion?

1 ( +1 / -0 )

Hmmmm, so I guess I'll have to cut my employees benefits , salaries, in order to report profits now? I've been operating just below the borderline for corp profits, since as my business does better, I increase everyone's benefits / salaries. I'd rather give money to my employees than to the J-govt tax system....but if they are going to punish me for not taking higher corp profits then I guess I should be more greedy and cut salaries / benefits increases ?

0 ( +1 / -1 )

"Why is Japan's stock market nowhere near making all time highs, while ex-Japan stocks globally have been making record highs with regularity in recent times?"

Because to set a "record," it would need to surpass the height of the 1991 bubble, which was an extraordinary event that should never be repeated.

The Nikkei has nearly doubled over the past 18 months, which isn't shabby at all. Anyway, stock prices aren't really important: govt policy rarely targets stock index values.

The point is Japan's new tax policies are punishing consumption, at a time when consumption is critical to get the economy on a recovery track.

0 ( +0 / -0 )

JeffLee,

I see back then the S&P 500 was trading around 300. Now it's close to 2000. So US stocks are more than 6 times higher. Japanese stocks, meanwhile, aren't even half of where they peaked at.

But Japanese companies have loads of cash and deserve a good shellacking nonetheless? Something doesn't add up if you ask me.

Anyway, stock prices aren't really important: govt policy rarely targets stock index values.

Rising stock prices over time may be indicative of the fruits of good policy though. Whether that's the case in the US is perhaps debatable, but in Japan's case stocks haven't risen to start with so there shouldn't even be any debate. A better business environment in Japan would likely have positive effects for consumption, whereas we already know what we would get with more of the same.

0 ( +0 / -0 )

@fxgai

"I see back then the S&P 500 was trading around 300"

No it wasnt. It was around 1,400.

You need to have numbers at least in the ballpark to have a convincing argument.

"But Japanese companies have loads of cash and deserve a good shellacking nonetheless?"

If they're turning in healthy profits, paying bigger and bigger dividends, sitting on record piles of cash and routinely receive tons of govt subsidies (yes is the answer to all 4 questions), then they DONT deserve a further tax cut.

Weren't you the one braying about the urgency for Japan to fix its balance sheet? And now you think that society's wealthiest entities should be contributing even less than before? Yep, makes perfect sense.

-1 ( +0 / -1 )

No it wasnt. It was around 1,400.

I don't see 1,400 until circa 2000, e.g. a whole decade after Japan's stock highs. http://stockcharts.com/freecharts/historical/spx1960.html

So again, Japan's relatively pathetic long term stock market performance make it obvious that the business environment in Japan is relatively poor.

they DONT deserve a further tax cut.

There's a telltale sign - your use of the word "deserve" illustrates just how backwards you have things.

Weren't you the one braying about the urgency for Japan to fix its balance sheet? And now you think that society's wealthiest entities should be contributing even less than before?

They would contribute more if the business environment were considerably improved, which is the point. Abe has this part right.

1 ( +1 / -0 )

"... if the business environment were considerably improved..."

Why "improve" the business environment when the corporates have already got nearly everything they've asked for in recent years through their lobbying. Anyway, they'll use more and more surplus funds and capital for overseas investments. Like how they gladly gave away the nation's high-speed rail technology, largely funded by us taxpayers, to China.

"I don't see 1,400 until circa 2000, e.g. a whole decade after Japan's stock highs"

I said in the past 18 MONTHS.

-1 ( +0 / -1 )

Why "improve" the business environment

Because improving the business environment would result in benefits for the Japanese populace.

I said in the past 18 MONTHS.

I see - so to be clear, I had refered specifically to the days of the Japanese bubble. So again, while US stocks have gone up roughly 6 times over that period, something stinks so bad in Japan that quarter of a century can pass, and stocks are not even half their peak at the bubble, even with 18 MONTHS of not too shabby performance (most of which came in the first 6 months as the yen weakened)

I think Abe could do much better for the Japanese people.

0 ( +0 / -0 )

"Because improving the business environment would result in benefits for the Japanese populace."

Not if the "population" ie, consumers, is having its purchasing power removed in order to achieve this. We've had a consumption tax hike and now pledges to broaden the tax base to compensate for tax cuts for corporations, which are already healthy and very wealthy!.

This degree of inequality is one of the major factors for the prolonged low economic growth, not just in Japan, but also in other developed countries as well.

0 ( +0 / -0 )

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