Wednesday, December 15, 2010

Tax competition 2: Japan

There is a move by Japan's new leadership to cut corporate income tax rate by 5 percent, from the current 40.7 percent. Japan's political leaders noted that corporate tax rate in UK is only 28 percent and 25 percent in China. See the news report today here, Japan to cut corporate tax to boost economy .

A 35.7 percent corporate income tax rate is still high, but the move is on the right direction. Hong Kong and Singapore have only about 16 percent corproate income tax rate, and these are two of the financial heavyweights in Asia.

The Finance Ministry expressed worries that tax revenues will decline by at least $16.8 billion equivalent as a result of the tax cut. I am not sure if they only assumed that business volume will remain as before. Because a tax cut would usually be followed by faster economic activities as companies and their people will work harder as they retain more of their incomes.

Over the long-term, low tax rates will result in more economic activities, more tax base, and governments may even collect more taxes from more businesses.

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