Analysis of Corporation Tax Reduction

◆The Abe administration has decided to raise consumption tax in April 2014 as scheduled. To mitigate the adverse effects arising from this hike, the government is likely to work out policy measures by December. Of those under review, worth monitoring is a reduction in the corporation tax rate.

◆According to Mirrlees Review, Reforming the tax system for the 21st century, released by the Institute for Fiscal Studies, a UK private think-tank, the rate of corporation tax affects decision making by multinational companies in three stages: first, selecting nations in which to invest; second, weighing up how much to invest; and finally, determining nations where earnings belong.

◆Japanese companies have aggressively invested overseas, resulting in a sharp uptrend of their production overseas. In contrast, exports from Japan have been flagging, likely generating downward pressure on the economy.

◆Factors pushing up the overseas production ratio were a higher corporation tax rate and a shift to a stronger yen. While appreciation of the yen has been softened to some extent by BOJ’s qualitative and qualitative easing measures, to curb the production shift overseas it will be indispensable to lower the corporation tax rate.

◆If the effective average corporation tax rate is lowered by 10-percentage points, exports would likely rise Y2.3 trillion a year and domestic production Y4.7 trillion. The effect is not of a one-time nature but will have an enduring effect.

◆In planning growth strategy for Japan, it will be important to harness and take advantage of growth in Asian and other economies. In the process, it will be indispensable that manufacturers repatriate production to Japan, and, to encourage this, reducing the corporation tax rate could be an effective stepping stone. Thus, for the government to exhibit determination in steadily pursuing growth strategy, it will be indispensable for it to announce a decision to reduce the corporation tax rate on an early occasion.