Prime Minister Shinzo Abe’s top economic chiefs have failed to agree on a contentious corporate tax cut amid lingering skepticism that the move will bolster the deflation-mired economy and amid pressure on business leaders to raise wages.
Abe, Finance Minister Taro Aso and economic and fiscal policy minister Akira Amari met Friday to put the final touches on an economic stimulus package, including the corporate tax reduction, in an attempt to soften the blow to the economy of the planned sales tax hike to 8 percent next April from the current 5 percent.
But Amari, a proponent of cutting business taxes, told reporters after the meeting that the details of the package “have yet to be decided,” indicating the three were unable to meet halfway over the issue.
Abe is eager to decrease the corporate tax rate to a level that could stoke the real economy, while Aso, who also serves as deputy prime minister, is opposed to an aggressive tax cut, given Japan’s precarious fiscal health, the worst among major industrialized economies.
At a news conference earlier Friday, Amari said the government plans to terminate, by a year earlier than planned, a special corporate tax surcharge that was introduced to finance reconstruction projects in areas wrecked by the March 2011 earthquake and tsunami.
Scrapping this surcharge at the end of fiscal 2013 next March, which will reduce the current overall tax rate of around 38 percent on Tokyo-based firms by some 2 percentage points, is likely to be part of the stimulus package to be finalized by the end of this month.
Amari suggested he believes a corporate tax cut is needed to help end nearly two decades of deflation, telling the news conference it would help to create a “virtuous circle” in which growth in corporate profits would power an expansion in wages, consumption and production.
He added the government will secure the necessary financial resources, trying to dispel concern that an earlier end to the three-year 10 percent surcharge on corporate taxes could slow reconstruction in disaster zones in the northeast.
The de facto corporate tax cut would total an estimated ¥900 billion, while other tax cuts to invigorate business investment and promote wage growth are expected to come to several hundreds of millions of yen, government sources said.
Aso repeated his reluctance to cut the corporate tax rate in an overly aggressive way, saying at a separate news conference earlier Friday that it is uncertain whether the potential increases in profits resulting from the measure would bring about growth in jobs and wages.
Aiming to avoid such a scenario, Abe called on business and labor leaders to cooperate in boosting wages and employment the same day, saying, “The government will consider drastic steps to create a virtuous circle (for the economy), so I hope the business and labor communities will make drastic moves as well.”
He made the remarks during the government’s first meeting with business and labor union chiefs, including Keidanren Chairman Hiromasa Yonekura and Nobuaki Koga, president of the Japanese Trade Union Confederation (Rengo).
It is rare for a prime minister to directly pressure corporate and union leaders to hike wages because the issue is a private-sector matter.
Yonekura told reporters afterward that a corporate tax cut would help trigger wage growth.
The effective corporate tax rate, consisting of national and local taxes, stood at roughly 38 percent as of January for companies based in Tokyo, higher than Germany’s rate of 30 percent, China’s 25 percent and Singapore’s 17 percent, according to Finance Ministry data.
Some experts say the nation’s high corporate tax rates have made foreign companies unwilling to operate in the country, choking economic growth.
Abe is likely to announce Oct. 1 whether his administration will go ahead with the first of the two scheduled consumption tax hikes to raise funds to cover swelling social security costs from Japan’s aging population. The second round would increase the levy to 10 percent in October 2015.
A ¥5 trillion stimulus package to prevent the tax hike from hurting the economy is expected to be unveiled by the government the same day.