Japan’s Corporate Income Tax: Facts, Issues and Reform Options

August 4, 2014

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Ruud A. de Mooij, and Ikuo Saito. Japan’s Corporate Income Tax: Facts, Issues and Reform Options, (USA: International Monetary Fund, 2014) accessed November 29, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper explores how corporate income tax reform can help Japan increase investment and boost potential growth. Using international and Japan-specific empirical estimates of corporate tax elasticities, investment is predicted to expand by around 0.4 percent for each point of rate reduction. International consensus estimates suggest further 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 found to be limited and some forms of base broadening will undo positive investment effects of a rate cut. Alternative revenue sources 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.

Subject: Allowance for corporate equity, Consumption taxes, Corporate income tax, Income, National accounts, Personal income tax, Taxes

Keywords: Allowance for corporate equity, CIT base, CIT rate, CIT reform, Consumption taxes, Corporate income tax, Cost of capital, Dynamic scoring, Enterprise tax, Europe, Income, Investment, Japan, Personal income tax, Rate change, Rate of return, Rate reduction, Reduction in Japan, Reform option, Revenue loss, Revenue-to-GDP ratio, Tax burden, Tax distortions, Taxable income, WP

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/138
Stock No:

WPIEA2014138
ISBN:

9781498300094
ISSN:

1018-5941

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