Abenomics has thus far been well-received in Japan and Shinzo Abe won a convincing re-election last spring. Now, Abe is setting his sights on reforming the Japanese tax code, which many critics feel creates too much of a burden on corporations. Two of the key measures of Abe’s reforms center around cutting corporate tax rates while increasing revenues through a higher sales and consumption tax.
Abe’s overall economic strategy
Japan sports one of the industrialized world’s highest corporate business taxes at 38.01 percent. The ruling parties have now agreed to lower this tax rate to 35.64 percent, a modest tax decrease but one that could spur private sector investment and expansion none-the-less. The tax decrease will allow companies to keep nearly 10 billion dollars more in their coffers. This move could also hint at Abe’s overall economic strategy: a shift from government driven economic to private sector driven economics.
While corporate taxes will be cut, Japanese consumers will be expected to fork over an additional $600 dollars or so in sales taxes per year. This will be accomplished by raising the consumption tax from 5 percent to 8 percent in 2014. This should generate over 80 billion dollars in additional revenue for the government, though there is a risk that consumption itself could decline by unexpectedly large amounts. Abe has stated that increasing tax revenue is essential due to the country’s high debt levels.
Japanese recovery already on weak footing
Many critics have already slammed this move as coming at a bad time. Critics charge that with the Japanese recovery already on such weak footing, it makes no sense to raise taxes. The sales tax specifically could lower consumer spending which would have a negative impact on many Japanese firms. Further, many Japanese families are already struggling and may not be able to shoulder the tax increases.
Still, something needs to be done about Japan’s massive debt, which now stands at nearly 215 percent of the economy. Many analysts like to point out that most of this debt is owned by Japanese citizens and interest rates are low, but this should offer little reassurance. A 215 percent debt level is a 215 percent debt level, no matter how you cut it. And if Japan should ever default on this debt, the country could literally go from one of the richest to one of the poorest countries over night.
Japan is also looking to ramp up its stimulus efforts
Japan is also looking to ramp up its stimulus efforts. The Japanese economy has been limping along since a real-estate and financial collapse in the early 90’s and while some Japanese firms, such as Toyota, have done well in recent years, many others are continuing to struggle. The details of the stimulus package have not yet been outlined, but it will aim at spurring innovation and breaking the cycle of stagnation that has plagued Japan in recent years.
What will be interesting to watch is how Japan’s population reacts to these moves. Japan already has a high cost of living, so the consumption tax will increase burdens on Japanese families. At the same time, there is a risk that companies could simply funnel the money granted through tax cuts overseas and expand operations in places such as China. On the other hand, if economic growth starts to expand at a more rapid pace, Abe will almost certainly see a boost in popularity and consumer consumption could rise even in spite of the tax increase.
Shinzo Abe is taking a major gamble
Either way, Shinzo Abe is taking a major gamble through these policies. If he succeeds, he will look like a genius. If the policies fail to drive substantial economic growth, however, his plan might backfire and these policies could ultimately cost him his job in the long run. At the same time, if Japan’s debt continues to grow, they may quickly find themselves facing a full blown fiscal crisis that could destroy the economy regardless of Abe’s other policies.