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Kan approves 5-point cut off corporate tax / Revenue loss will ramp up fiscal pressure

Prime Minister Naoto Kan has decided to go ahead with slashing the corporate tax rate, the centerpiece of tax reform for fiscal 2011, but observers said it remains uncertain from where the resources to make up for revenue shortfalls will come.

Kan decided Monday night to lower the effective corporate tax rate, which currently stands at 40.69 percent, by five percentage points, a move the government considers necessary to prop up the economy. Kan said he hoped "businesses will take advantage of funds saved from the tax cut to expand domestic investment and employment."

A five-point cut in the effective corporate tax rate, which combines national and local taxes, is expected to cause a 1.5 trillion yen shortfall in state coffers.

In the end, Kan chose the proposal for a five-point cut over a proposal for a three-point reduction. Several Cabinet ministers were heavily involved on both sides, including Koichiro Gemba, state minister in charge of national policy, and Finance Minister Yoshihiko Noda.

Speaking at a news conference after a regular Cabinet meeting Tuesday, Noda said the cut would make compiling the fiscal 2011 budget more difficult, as spending has been capped at 71 trillion yen and the issuance of new government bonds at 44 trillion yen.

"We'll have to work very hard to come up with a budget under these severe conditions," Noda said.

The planned corporate tax cut will consist of 4-1/2 points off national taxes and a half point off local taxes, Noda said. He also said Kan had asked him Monday to agree to the tax cut to stop deflation, promote economic growth and increase employment.

The current effective corporate tax rate is relatively high by international standards.

Opinion over the issue had created a divide between the Economy, Trade and Industry Ministry and the business community--which both called for a tax cut--and the Finance Ministry, which was worried about tight finances. Eventually the prime minister made the final decision, tilting the balance toward the five-point cut.

The focus will likely now shift to securing resources to offset the expected 1.5 trillion yen decline in tax revenue. The government believes it can secure about 650 billion yen through negotiations between METI and the business community, by revising tax breaks and other financial incentives currently given to companies, officials said.

An additional 260 billion yen could be obtained by ramping up the inheritance tax.

However, even if the government can secure these additional sources of tax revenue, the total shortfall is still expected to be about 600 billion yen.

To make up for this, the Finance Ministry hopes to cooperate with local governments. However, negotiations with the Internal Affairs and Communications Ministry, which has jurisdiction over local governments, are expected to be difficult, because local governments likely will insist the corporate tax cut be limited to the central government's portion.

The government wants to obtain Cabinet approval for the tax reform outline for next fiscal year on Thursday. Discussions on tax reform also include how to fund additional child-rearing allowances and a restriction of income tax deductions.

SDP, PNP not happy about cuts

The People's New Party and the Social Democratic Party, the current and former coalition partners of the Democratic Party of Japan, respectively, expressed opposition to the plan to decrease the effective corporate tax rate.

Policymakers of the three parties met at the Prime Minister's Office on Tuesday to discuss the tax cut and other issues ahead of the compilation of the fiscal 2011 budget.

The SDP and PNP also argued against a government plan to allocate funds to carry out a Japan-U.S. agreement to move the U.S. Marine Corps' Futenma Air Station in Ginowan, Okinawa Prefecture, to the Henoko district of Nago in the prefecture.

(Dec. 15, 2010)
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