Japan’s Corporate Income Tax: Facts, Issues and Reform Options
IMF Working Papers, August 4, 2014
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Bibliographic details
- Authors: Ruud A. de Mooij, Ikuo Saito
- Published: August 4, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498300094.001
Summary findings
- Corporate income tax reform can help Japan increase investment and boost potential growth.
- Investment is predicted to expand by around 0.4 percent for each point of rate reduction.
- International consensus estimates suggest that between 10 and 30 percent of the static revenue loss could be recovered in the long run through dynamic scoring, although Japan’s offset may be closer to the lower bound.
- Compensating fiscal measures are necessary in light of Japan’s tight fiscal constraints.
- The scope for base broadening in the corporate income tax is limited and some forms of base broadening will undo positive investment effects of a rate cut.
- Alternative revenue sources identified include higher consumption and property taxes.
- A gradual approach toward lowering tax rates mitigates windfall gains and reduces short-run revenue costs.
- An incremental allowance-for-corporate-equity system could boost investment with limited fiscal costs in the short run.
Elasticities and investment effects
- Empirical estimates (international and Japan-specific) imply:
- Investment expansion of around 0.4 percent for each point of rate reduction.
Revenue effects and dynamic scoring
- Static revenue loss recovery via dynamic effects:
- International consensus range: between 10 and 30 percent recovered in the long run.
- Note: Japan’s offset may be closer to the lower bound of this range.
Fiscal constraints and compensating measures
- Japan faces tight fiscal constraints that necessitate compensating fiscal measures if corporate rate reductions are undertaken.
- Suggested compensating approaches include:
- Exploring alternative revenue sources such as higher consumption taxes.
- Exploring higher property taxes.
Base broadening and distributional/efficiency trade-offs
- The scope for base broadening within the corporate income tax is limited.
- Some forms of corporate tax base broadening will undo the positive investment effects expected from a rate cut.
Reform design options and sequencing
- Gradualism:
- A gradual approach toward lowering tax rates helps mitigate windfall gains and reduces short-run revenue costs.
- Allowance-for-corporate-equity (ACE):
- An incremental ACE system could boost investment with limited fiscal costs in the short run.
Key statistics and identifiers from the content unit
- Publication date: August 4, 2014
- Working Paper series: Working Paper No. 2014/138
- Pages: 44
- DOI: https://doi.org/10.5089/9781498300094.001
Content based on "Japan’s Corporate Income Tax: Facts, Issues and Reform Options" (IMF Working Paper).