June 17 (Bloomberg) -- Shinzo Abe should cut the corporate tax rate in one stroke to match rivals and help Japan survive a global tax “war,” said an adviser to the prime minister.
“It’ll be much less effective if we don’t substantially cut the levy,” Koichi Hamada, 78, a retired Yale University professor who advises Abe on monetary policy, said in an interview yesterday in Tokyo. “By cutting the rate significantly, Japan can attract investment from abroad and keep Japanese companies at home.”
Abe said last week he’d aim to lower corporate taxes from next year to under 30 percent over the next few years. Hamada proposes reducing the levy of about 35 percent -- the second highest among Group of Seven nations -- to a rate close to the 23 percent in the U.K. and 24 percent in South Korea.
“Japan hasn’t done anything in the corporate tax war so far,” said Hamada. “We won’t be accused of starting a tax war because the current rate is so high.”
The U.K. has cut its rate in several steps to 23 percent from 30 percent in 2007, while South Korea’s levy fell from 28 percent in the same period, according to Organisation for Economic Co-operation and Development data.
Abe has made company tax cuts a flagship policy for the latest round of his growth strategy. A draft of the plan released yesterday shows the government proposes changes to labor regulations, and the creation of a corporate governance code.
The prime minister’s announcement last week was “an arrow, but was not the bazooka that investors need to lower the risk premium on Japanese assets,” Robert Feldman, head of Japan economic research at Morgan Stanley MUFG, wrote in a report yesterday.
Under Abe’s current plan, the most likely scenario is for cuts of 2 percentage points each year from the fiscal period starting April 2015 through fiscal 2017, Nomura Securities Co. economists wrote in a June 13 report. The boost to real growth would be about 0.1 point in each of those three years, Nomura estimates.
The focus of the tax debate has shifted to finding funds to pay for cuts to the corporate rate as Abe seeks to constrain the world’s highest debt burden. Finance Minister Taro Aso reiterated today that revenue is needed to offset any reductions in the tax rate.
A 1 percentage point reduction in the levy would cause an annual revenue loss of about 470 billion yen ($4.6 billion), according to the finance ministry.
Bank of Japan Governor Haruhiko Kuroda last week kept up the central bank’s pressure on the government to put its finances in order.
“It’s an essential precondition for sustainable growth of the Japanese economy to establish a sustainable fiscal structure,” Kuroda said. The BOJ “strongly hopes” for steady implementation of steps toward fiscal consolidation, he said.
Hamada said cutting special exemptions on corporate tax would help pay for reductions in the rate.
Hamada said the central bank doesn’t need to ease further at the moment, though it may have to use some of its ammunition should the economy clearly deteriorate due to the impact of a sales-tax increase in April.
The BOJ maintained its unprecedented easing at a policy meeting last week, in line with estimates of all economists in a Bloomberg News survey.
An acquaintance of Abe since 2001, Hamada travels regularly to Japan from his Connecticut home to advise the prime minister.
To contact the editors responsible for this story: Paul Panckhurst at email@example.com Andy Sharp, Arran Scott