Nothing But Tax Reduction

Prime Minister, Shinzo Abe, finally announced his gambling economic policy package on Tuesday, which included ¥2 trillions of tax reduction for corporation. It was aimed to put business on the top among his policies, even beyond crisis stemming from the Great East Japan Earthquake and accident in First Fukushima Nuclear Power Plant. If he fails in getting rid of long-time deflation, the greatest cause of his economic policy, he will be blamed as a cruel leader who turned his back to victims of the disaster.

The measures for encouraging business were compensation for introducing higher rate of consumption tax, additional 3% on current 5%, starting next April. Although Abe took a pose as if considering about whether or not to do it, it had been unrealistic to turn down the introduction, for making decision of the tax hike would require a great deal of political power, if he had abandoned it.

Abe’s preference to business sector was outstanding, anyway. He made up his mind to pour ¥5 trillions to avoid negative impact of consumption tax hike. For companies that introduce new capital investment, the government will ease taxation. If a company settles new high-technology devices, there will be tax relief of 5% or application of one-year depreciation with lighter tax burden. When another company increases total wage for employees by 2% in FY 2013 and 2014 or 3% in FY 2015, it can receive tax ease in other ways.

What he receives from both supporting and opposite parties are criticisms on his decision of ending special corporate tax for reconstruction one year earlier than planned. He takes ¥900 billions into account for its positive impact on companies. He also insists on that recourse for compensating the budget for reconstruction has been already reserved. However, he does not approve taking advantage of that resource directly for reconstruction, instead of corporate tax reduction.

In addition to corporate tax reduction, Abe introduces economic stimulation policies, which include giving away of cash to low-income families and new house buyers. The rest of policies, which are actually of the greatest amount in the package, are routine investment to infrastructure constructions. Total amount of the package will be ¥5 trillions.

This extreme preference to corporation may bring moral hazard of fiscal policy. It is still possible for companies to stock money they will get from tax reduction, instead of paying enough salary to their employees. There is an idea even in Liberal Democratic Party to introduce new tax for that internal reserve. All depends on whether Abenomics will be successful.