LDP's Nakagawa Says Japan Should Cut Corporate Tax

By Keiko Ujikane and Kyoko Shimodoi

Aug. 12 (Bloomberg) -- Japan should cut the nation's corporate tax by a quarter to encourage investment and growth in the world's second-largest economy, said Shoichi Nakagawa, former policy chief for the ruling Liberal Democratic Party.

``Even if tax revenue falls in the near term, a tax cut may help revitalize business activity and eventually lead to a rebound in tax receipts,'' Nakagawa, 55, said in an interview in Tokyo on Aug. 7. He recommended lowering the level to about 30 percent from 40.7 percent, the highest among Organization for Economic Cooperation and Development nations.

Calls to ease the tax burden on companies have grown among policy makers who want to attract investment into what European Union Trade Commissioner Peter Mandelson in April called the developed world's ``most closed market.'' The government isn't likely to act soon as it struggles to meet a goal of balancing the budget by 2011 to cut the world's largest public debt.

``It's necessary to cut corporate taxes from the point of view of international competitiveness, but it's difficult to do it now because the government has pledged fiscal reform,'' said Keisuke Naito, a senior economist at Mizuho Research Institute in Tokyo. ``Policy makers acknowledge they have to do something to shore up the faltering economy.''

The main focus of the discussion within the ruling coalition is now focused on whether to raise the sales tax from 5 percent to help the government to pay for swelling welfare costs.

The government said last week the economy is ``weakening'' for the first time since May 2001. Prime Minister Yasuo Fukuda yesterday described the economic situation as ``severe.''

`Alarmed'

``I am alarmed that the global and Japanese economies have entered into a critical situation,'' Nakagawa said. ``Japan should examine all possible options.''

Nakagawa, now a lower house legislator, was LDP policy chief from September 2006 until August last year. He estimates a 10 percentage point tax cut may boost foreign direct investment by 30 percent, or about 1.2 trillion yen ($11 billion).

Foreign direct investment represented about 3 percent of Japan's gross domestic product at the end of 2007, according to the Cabinet Office. That compared with 45 percent in the U.K., 14 percent in the U.S. and 8.8 percent in South Korea. Japan's government is aiming to boost foreign investment to 5 percent of GDP by 2010.

Japan's high corporate tax rate may hurt ``the vitality of Japanese companies and their international competitiveness,'' Nakagawa said. ``It also becomes an obstacle to foreign companies that want to invest here.''

Japan should also broaden its tax base and increase the sales tax, which at 5 percent is the lowest in the OECD, the Paris-based organization said in its April survey on Japan.

Only One Third Pay

Only about one third of Japanese companies pay taxes and a quarter of employees are exempt from personal income levies because of ``generous'' exemptions and deductions, according to the OECD report.

Nakagawa said Japan needs to find a way to broaden the tax base not only on companies but also individuals and other bodies. Still, he said Japan should also consider allowing more deductions to ease the total burden on companies by as much as 3 trillion yen.

Japan's total tax revenue was 51.02 trillion yen last fiscal year, with corporate tax of 14.7 trillion yen, according to the Ministry of Finance.

New ministers in Fukuda's Cabinet, which he reshuffled this month, have also indicated support for a tax cut. Financial Services Minister Toshimitsu Motegi said he will consider lowering taxes to attract investment from abroad and Economy Minister Kaoru Yosano said that he wouldn't rule out reductions.

The U.K., Germany, China and South Korea cut company tax this year to spur economic growth and lure foreign investment.

``Everybody in the world is cutting corporate taxes,'' said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo. Japan ``will have to do it in the long run.''

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net