This week, President Obama held a summit in Washington, D.C., with top CEOs to discuss a variety of economic topics. Among them was U.S. competitiveness in the global economy, with Obama describing the issue upfront as an “overarching theme,” and with the message being sent that competitiveness impacts domestic job creation.
Obama’s comments were timely, because on Tuesday, it emerged that Japan, which currently maintains the highest corporate tax rate of any O.E.C.D. (i.e., developed) nation, will cut its corporate income tax by “5 percentage points in a bid to shore up its sluggish economy,” according to the New York Times.
Currently, Japan’s corporate tax rate is about 40 percent, slightly higher than but roughly the same rate as the U.S. rate.
However, Japanese leaders aim to cut the tax rate in order to make the country more competitive, internationally, provoke new investment and boost job creation. Japan is worried about its unemployment rate of 5.1 percent–a figure of envy to most in Europe and the U.S., where unemployment is running substantially higher.
The fact that Japan’s corporate tax rate, post-cut, will remain higher than that of South Korea (24 percent) or Germany (29 percent) however has some figures skeptical as to whether the plan will work. In addition, Japan may raise its consumption tax rate to offset the cut, which could minimize positive effects that would otherwise flow from it.
Despite this, speculation abounds that the cut will improve Japan’s standing as against the U.S., where discussion surrounding tax cuts is currently focused on individual rates, as opposed to corporate rates. Once Japan’s cut has been implemented, the U.S. will become the O.E.C.D. nation with the highest corporate rates, which unlike most countries taxes the income of Americans and American companies worldwide.
The Obama administration meanwhile continues to pursue the nixing of tax policies originally put in place to enable American companies to compete globally, given these two substantial disadvantages.
Observers say that Obama remains personally committed to curtailing a tax credit known as the “dual capacity tax credit,” which prevents double taxation of U.S. companies with foreign offices. Recently, Obama and congressional allies have sought to limit the availability of this tax credit to oil and gas firms, specifically.
During 2009, Obama had pursued a more broad-based curtailment plan that would have affected other tax provisions designed to enable U.S. companies to compete against, say, German, Korean or British firms who are subject to a more favorable tax regime, and limited the availability of tax credits to firms in many industries seeking to avoid double taxation.
It remains to be seen what the precise effect of Japan’s proposed cut will be, but for now, it appears that the U.S. is set to move into the top spot in terms of high corporate taxes.
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