Is lower corporate tax the answer?

Thu, 22 Aug Pre-Open

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Since the slowdown in the global economy, global policy makers have been coming up with tools in an attempt to find a rescue from the crisis. However, overtime, such measures have done more harm than good, thus deepening the crises. Quantitative easing was one such tool used by US. Its use has hardly pulled back the economy out of the slump. However, its withdrawal is likely to create adverse impact. Nonetheless, the lesson seems to be lost on Japan as it has announced a massive stimulus programme - Abenomics with an expectation to bring about economic revival.

As if this was not enough, Japan has gone a step further. As per an article in The Economic Times, the Japanese government has floated a proposal to cut down the corporate tax rate. It is important to note here that the corporate tax rate in Japan surpasses the global average by a wide margin. With lower tax and higher retained earnings, it is assumed that the corporates will be left with more funds to invest and revive the economy. However, what is totally being disregarded here is the consumer demand. Again, the government has overlooked the fact that is not the lack of funds that is holding back corporates in Japan. This is evident from the huge amounts of cash with the companies that is lying unused. Further; the cut down in the corporate tax rate will reduce government's collections. This along with huge fiscal spending spree Japan has already entered into could be a double blow to the country's fiscal health. What is more ridiculous about the entire affair is that the move to slash corporate tax rate is being mulled over to offset the impact of two fold increase in sales tax rate. So basically, if the proposal does get implemented, consumers will end up subsidizing corporate earnings.

It is important to note here that while effective corporate tax rate in Japan (38% in 2013) is higher than the global average, the difference is relatively less when compared to the rate in India. Both the economies are facing bad fiscal health and burdened with high debt to GDP ratio. An important lesson that India should learn from Japan here is what not to do. Such economies, instead of resorting to short term measures like monetary stimulus or tax rate slashes should focus on real value creation. As far as India is concerned, the need of the hour is to rationalize tax structure, bring in reforms and ensure tax discipline (with regards to collections). For Japan, all we can say is that while growth should be the concern, one cannot ignore the cost at which it comes. Instead of adopting measures that tempt to make economic statistics look good in the short term, policymakers should focus on following a disciplined approach for long term value creation.