Oct 07, 2017 (Nikkei) - As Japan moves within striking distance of beating the deflation that has plagued the nation for so many years, the leading parties in the Oct. 22 general election have laid out platforms that lean worryingly close to populism rather than offer ways to parlay this progress into stable economic growth.
Japanese companies have been urged to channel their record profits into capital spending and wage hikes rather then simply stash them away. The Bank of Japan has championed this cause, and found not a few supportive voices in government. But a proposal by Tokyo Gov. Yuriko Koike's new national party to tax these cash hoards goes a step too far.
Japan cut its effective corporate tax rate to the 20% range in a bid to keep multinationals on its shores. It seems incomprehensible to propose reversing course and raising businesses' tax burden just as President Donald Trump is proposing to slash the U.S. rate from 35% to 20%. Prime Minister Shinzo Abe's often heavy-handed prodding for businesses to invest has its pros and cons, but a campaign promise to tax retained earnings crosses a line.
Positioning this measure as an alternative to raising the consumption tax from 8% to 10% as scheduled in October 2019 is also dangerous. An increase of 1 percentage point in the tax rate yields an estimated 2.8 trillion yen ($24.7 billion) in annual revenue. Though it may be true that economic conditions should influence deciding whether to go ahead with the tax hike, it is unreasonable to demand that businesses fill that large a gap.
Questionable fiscal proposals are not limited to Koike's Kibo no To, or Party of Hope. Abe's ruling Liberal Democratic Party has pledged to use part of the proceeds from hiking the tax to make child care and education free for all children ages 3-5, as well as for children 2 or younger in low-income households. Some poor families would also receive government aid for higher education under this plan.
The LDP stresses building a social safety net that works for all generations. But adding new benefits while maintaining current entitlements for seniors borders on throwing out cash by the handful. Erasing Japan's budget deficit would become impossible despite the tax hike, and future generations would be stuck with the bill in the form of national debt.
