Saturday, December 27, 2014

Will the “Abenomics” Corporate Tax Reduction Discourage Risk-Taking and R&D?

Media reports tell us that the Abe administration and the LDP Tax Council have agreed on a two-stage 2.51 and 3.5 pp reduction of the effective corporate tax rate from the current 35.64% to 33.13% to 29-30%. The stated objective is to stimulate investment by bringing the rate closer to the lower rates prevailing in South Korea, Singapore, China and the like. The reduction will be largely offset by measures designed to increase taxes on corporations.

I have misgivings about this.

First, to the extent that the reduction is offset by an increase, the effective corporate tax rate remains the same. The tax burden is merely being shifted among corporations.

Second, the offset, at least in the first stage, will be achieved by the following means:
(1)   Increasing the corporation business tax. The corporation business tax is a prefectural corporate income tax. In the case of a corporation with paid-in capital of more than 100 million yen, part of the tax is assessed on a composite of value-added (wages, net interest paid, net rent paid, and annual profit) and equity (paid in capital plus capital reserves).
(2)   Reducing loss carryovers. The current maximum carryover is nine years. The media reports do not give any details.
(3)   Reducing R&D tax benefits.
(4)   Increasing taxation on dividends between family corporations.
Measures (1) and (2) will punish corporations that incur losses. In principle, this will discourage risk-taking. Measure (3) will also discourage risk-taking and specifically reduce incentives on activities that lead to innovation. Measure (4) does not appear to be inherently discouraging for risk-taking behavior, but it will be a constraint on managing corporate finances.

So the “reduction” of the effective corporate tax rate, at least in the first stage, turns out to consist largely of a shift in the tax burden that discourages risk-taking activities and R&D. Doesn’t that run counter to the very purpose of Abenomics?

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