Can Japan Afford to Cut Its Corporate Tax?

By Ruud de Mooij and Ikuo Saito

(Versions in 日本語)

It is no surprise that, as part of its revised growth strategy presented in June, the Japanese government has announced it will reduce the corporate income tax rate. At more than 35 percent for most businesses, the Japanese rate is one of the highest among the industrialized countries of the Organization for Economic Cooperation and Development (see Chart 1). Moreover, at a time when Japan needs to boost economic growth, the corporate income tax rate is generally seen as the country’s most growth-distortive tax.



Fixing International Corporate Taxation—Not Just a Problem for Advanced Economies

Mick KeenBy Michael Keen

It’s hard to pick up a newspaper these days (or, more likely for readers of blogs, to skim one online) without finding another story about some multinational corporation managing, as if by magic, to pay little corporate tax. What lets them do this, of course, are the tax rules that countries themselves set. A new paper takes a closer look at this issue, which is at the heart of the IMF’s mandate: the way tax rules spill over national boundaries, and what this means for macroeconomic performance and economic development. These effects, the paper argues, are pretty powerful and need to be discussed on a global level.

Follow the money

Take, for instance, international capital movements. Though tax is not the only explanation, the foreign direct investment (FDI) positions shown in Table 1 are hard to understand without also knowing that  tax arrangements in several of these countries make them attractive conduits through which to route investments. In its share of the world’s FDI, for example, the Netherlands leads the world; and tiny Mauritius is home to FDI 25 times the size of its economy.


To Owe or Be Owned—Depends on How You Tax It

Corporate tax codes in the United States, most of Europe, Asia and elsewhere in the world, create a significant bias toward debt finance over equity. The crux of the issue is that interest paid on borrowing can be deducted from the corporate tax bill, while returns paid on equity—dividends and capital gains—cannot. This debt distortion is not new. What is new, however, is that we have come to realize that excessive debt (or leverage) is much more costly than we had. The global financial crisis was a stark lesson about the risks of excessive leverage ratios in financial institutions. Designing a better system will ultimately pay off. And now is the time for change. A recent IMF Staff Discussion Note offers two alternatives that reduce or eliminate the more favorable tax treatment of debt.

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