Japan’s freshly minted prime minister announced last week that his new government would reduce Japan’s corporate tax rate, now the highest in the world among major industrialized nations, leaving the United States as the world leader in corporate taxation.
Within the pages of the Democratic Party of Japan’s newly released economic “growth strategy” report, one section outlined a plan to slash corporate tax rates by up to 15 percent. Japan’s current rate of around 40 percent will be reduced in increments as part of a multi-year plan that could start as soon as next year.
“Japan’s economy has basically been in a slump for the past 20 years and people have been overwhelmed by a sense of stagnation,” Japan’s Economy, Trade and Industry Minister Masayuki Naoshima told Agence France Presse, a wire service. “It is now the time to decide (on cutting corporate tax) for the sake of future economic vitality, employment and securing increased tax revenues.”
Japan’s proposed move would put it at pace with most other nations who are members of the Organization for Economic Cooperation and Development (OECD), a union of generally economically free and industrialized nations.
But with a corporate tax rate of 39.2 percent (when combining state and federal taxes), the United States would find itself taxing businesses more than any of the other nations in the organization. Economists say that high corporate tax rates will do little but drive business and investment out of the United States.
“You will see companies begin to expand abroad rather than here in the United States because the business environment here is not conducive to the growth of their company,” said Scott Hodge, president of the Tax Foundation, a think tank in Washington DC. “By keeping our corporate tax rate so high, we’re creating an economic Berlin Wall around the United States.”
The average tax rate for countries in the OECD hovers around 26 percent, making some of the lower taxing nations an enticing investment possibility for multi-national corporations that are looking to spread beyond the shores of their home countries.
“We seem to be the last country on Earth to realize that this is smart tax policy,” Hodge said. “The rest of the world looks like a tax haven.”
But not all economists and policymakers see Japan’s move toward lower corporate taxes as public policy to exemplify. A number of organizations have shown support for members of Congress and the White House in their effort make it more difficult for American companies to use other nations’ low tax status to avoid paying duties at home. They say the tax system that the United States employs is heavily biased toward corporations, and not the other way around.
“We are very kind to our corporations, overly kind,” said Robert McIntyre, president of Citizens for Tax Justice, also a Washington DC based research group. “We let our companies write off their investments much quicker than anybody else in the world and we have tax breaks for everything under the sun that other countries don’t allow.”
McIntyre noted that the United States may have one of the highest corporate tax rates, but it continually ranks as the country with the lowest rate of corporate tax collections.
While the fact holds true, there’s a perfectly good explanation, said Hodge.
“That’s like Neiman Marcus complaining that they have lower revenues and profits than Wal-Mart,” he said. “When you have everyday low prices, you attract a larger market. You become more competitive than everyone else and customers will flock to you. The same thing goes for corporate tax rates.”
Despite Japan’s decision to lower taxes on corporations, Democrats in Congress and the White House have made it clear they have no intention to follow Japan’s path any time soon.