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Saturday, Dec. 18, 2010


Ad hoc tax reform plan

After confusing discussions over where to find the funds needed to implement policy measures and to make up for tax cuts, the government Thursday approved the fiscal 2011 tax reform plan. The basic character of the plan is to increase the levy on the household sector, especially on rich individuals, while reducing it on the corporate sector.

Acceding to strong requests from business lobbies, the government decided to cut the effective rate of corporate tax by 5 percentage points from the current 40.69 percent. The cut will reduce the tax burden on firms by ¥1.5 trillion, although other tax burdens on them will increase by about ¥800 billion.

Prime Minister Naoto Kan hopes the corporate tax cut will stem the trend of moving production bases abroad and that firms will use the savings in taxes to increase domestic investment and employment. But there is no guarantee that this will happen. Major companies may simply increase their retained earnings.

Their retained earnings already top ¥200 trillion, reflecting their reluctance to take the risk of making investment. Japan's corporate tax rate is not the main reason for firms to move their production bases abroad. The main reason is cheaper labor costs and proximity to growing overseas markets. It is hoped that the corporate sector will act in the direction of revitalizing the domestic economy and that the government will push appropriate economic policies.

Regrettably Mr. Kan decided to cut corporate tax without first securing funds to compensate for the cut. The government has chosen the path of increasing income and inheritance taxes to implement the corporate tax cut and to increase the child allowance. The tax burden on the household sector will rise by ¥580 billion. This will include limiting deductions on taxable income for salaried workers earning more than ¥15 million a year and reducing the basic deduction on a taxable inheritance. Even so, offsets to the corporate tax cut will come up short.

The plan is an ad hoc solution for securing necessary funds. The government and political parties must rouse wide public discussions on long-range tax reform to stabilize tax revenues.

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