The 2-Minute Thought: Tax Reform in a Different Spirit

Suffering from tax reform fatigue?

 If so, perhaps it would be refreshing to take a look at something completely different -- like Japan, which also is planning changes to its tax code but in an entirely different spirit.

What’s different?  One thing is that although Shinzo Abe and his ruling Liberal Democratic Party are conservatives, they plan to raise taxes on high income earners.   

Another thing is that although they plan to lower corporate taxes to boost growth, they will only do so for those companies that raise wages and make capital investments for future growth. 

A third difference is that they clearly intend for the new plan to add to government revenue.  It’s been reported that a combination of tobacco and tourist taxes will increase government revenue by 280 billion yen ($2.5 billion), while an additional 90 billion yen ($800 million) will come from increased income taxes. 

Another difference?  According to The Japan Times, the tax reforms are expected to be approved in full with relatively little fuss in an ordinary Diet session starting next January.  If only things were always so easy.

Specifically, the LDP proposes raising taxes for salaried workers earning more than 8.5 million yen (about $75k).  The plan reduces a deduction for high-earning corporate employees while expanding a basic deduction for virtually all workers.  That’s an effort to help the growing numbers of freelancers, contractors, self-employed, and other non-traditional workers who haven’t been able to claim the deduction that salaried employees get.  It’s also a recognition that the economy has moved away from the old model of working for a single company one’s entire career.

Pensioners with incomes over $10 million yen (about $89k) would be taxed more – though families with children or other dependents requiring care would be shielded from the increase.  In addition, smokers of both tobacco and e-cigarettes would pay higher taxes.  And there would be a “departure tax” targeting tourists but applying to both Japanese and foreign travelers as they leave the country. 

The interesting thing is that according to The Financial Times, the statutory corporate tax rate over the next three years could fall from 27.9% to as low as 20% -- but only for corporations that raise their average wages by at least 3% and invest the equivalent of their depreciation charge.  Whether this all works the way it’s supposed to is yet to be seen, but at least the intent is clear:  to get corporations to spend their cash hoard on workers and capital investment.

In contrast, Andrew Ross Sorkin of The New York Times reported that at Jeffrey Sonnenfeld’s recent Yale CEO Summit, an electronic survey revealed that only 14% of participants planned to make large domestic capital investments as a result of cuts in the U.S. corporate tax rate.