IMF: Japan May Be Unable To Afford Its Corporate Tax Cuts

In an International Monetary Fund Working Paper published recently, Ruud De Mooij and Ikuo Saito discussed the effects of the Japanese government’s upcoming corporate tax cut. The current Japanese tax on corporate income is 35 percent – on par with the American tax. After the cut, Japan’s rate will be reduced to 30 percent, leaving America’s corporate income tax as one of the highest in the developed world.

The IMF’s annual Article IV consultation with Japan noted the need for the country to lay out a concrete, medium-term plan to reduce its debt, according to Tax-News. Even if another consumption tax increase were to be implemented in 2015, Japan’s gross debt-to-GDP ratio would remain over 240 percent. The IMF concurred with Japan that a cut in the corporate tax rate could lift investment and economic growth in the consultation, but cautioned that this cut would not be self-financing. The Fund concluded that Japan should only proceed with such a measure if other measures were taken to offset the resultant revenue loss.

In the IMF working paper and an accompanying blog post on iMFdirect, de Mooij and Saito explained that there is actually limited room for expansion of the Japanese corporate income tax base.

Why should we care? A growing number of American politicians and corporations are calling for a reduction in the U.S. tax code that is at least equal to, if not greater than, the one the Japanese are implementing. In many of these arguments, the work of Arthur Laffer is referenced, specifically “Laffer curves.” In this context, the reference is to the idea that a sufficiently high tax rate actually reduces revenues because of its extreme distortionary effects.

Some proponents of the corporate income tax cut in Japan have also referenced Laffer, suggesting that a reduction in the tax rate would lead to a sufficient expansion in the Japanese base that revenues will ultimately increase without the need for offsetting measures, according to de Mooij and Saito. While the U.S. is lucky to have the chance to watch a similar reduction in the tax code go into effect, the IMF writers caution in their Working Paper that empirical literature on corporate tax elasticities suggest that there will be a far more modest effect on the base.

As a corporate tax attorneys, Frank L. Brunetti and I often write about topics such as international tax trends, corporate tax cuts, corporate income tax, and corporate inversions. If you want to learn more about these areas of tax, trusts, and estates take a look at some of our previous posts:

• 20 profitable U.S. companies Paid No Corporate Income Tax Last Quarter
• NY Budget Ends Corporate Income Tax For Manufacturers
• REITs & The Corporate Tax Base
• What Corporate Inversions Are Telling Us (And What Washington Refuses To Hear)
• International Tax Trends