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Masahiro Shinohara

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Recent debates surrounding taxation reform on businesses in developed nations

Masahiro Shinohara
Professor of Public Finance and Tax Policy, Faculty of Economics, Chuo University

1. Introduction

One of my research themes is the comparative study of international tax reform. Below, of the recent debates surrounding taxation reform on businesses in developed nations, I will focus on and introduce an outline of the revision of capital income taxation in New Zealand’s 2010 tax reform and the 2010 abolition of business depreciable assets tax in France, as well as considering the implications these will have on tax reform in Japan.

2. New Zealand’s 2010 tax reform

The 2010 tax reform in New Zealand was its largest since the reforms in the 1980s under the Labour Party. The basic framework of the reform was a policy to lower tax rates and broaden the tax base (BBLR: Broad Base-Low Rate Approach), lowering income taxation rates (personal income tax and corporate income tax) as well as revising tax incentives and broadening the tax base. Also, from a viewpoint of promoting economic growth, income taxes were lowered at the same time as raising GST (Goods and Services Tax:the equivalent of Japan’s consumption tax), increasing the relative degree of dependence on consumption taxes in the tax system.

In the background to the 2010 tax reform was a fall in economic growth rate, a negative private savings rate and the existence of a budget deficit. Also, while gradual, the population is ageing, so it was thought necessary to secure a stable revenue source to combat the ageing population in the long term.

Before the reforms, the tax system was centered around income taxes with a high possibility of hindering economic growth. In regards to personal income tax, influence on the willingness of taxpayers to work and save and tax avoidance due to the low level of income in which the top tax rate was applied, a migration of the workforce to Australia due to the effective average tax rate overtaking that of Australia and the effect on the willingness to work and save due to the tax deduction with benefits system raising the effective tax rate along with income rise were seen as problems.

In regards to corporate income tax, first, statutory tax rates exceeded the OECD average, causing fears of controls on inward investments and an acceleration of profits heading overseas. Second, New Zealand subsidiaries get high allowable limits of deductible expenses on interest paid to the parent company in their countries of origin, resulting in a decline in corporate income tax revenue. Third, along with generous depreciation measures lowering tax revenues, they impeded investment neutrality. And fourth, there was a gap between the top income tax rate and corporate income tax rate, encouraging tax avoidance in corporate and investment entities (trusts etc.) by high-income earners.

In the 2010 tax system reform, two methods relating to capital income taxes, (1) method of equality between the top income tax rate and tax rates for corporations and investment entities, and (2) method allowing a gap between the top income tax rate, and tax rates for corporations and investment entities, were compared and studied. Method (2) included the alternatives of (3) bold reductions in corporate income tax rate, (4) dual income tax (classifying taxes for labour income and capital income), (5) ACE company tax (Allowance for Corporate Equity:taxation method which allows, not only interest paid, but also share issuance opportunity costs to be tax deductible), and (6) a combination of dual income tax and ACE company tax.

Method (1) had been adopted in the past (1987, 1989-1999), but with international pressure to lower corporate income tax rates, it became difficult to continue the method. In the end, through the reforms, a method that closed the gap as much as possible between the top income tax rate and tax rates for corporations and investment entities was chosen. New Zealand chose against adopting methods (3) to (6) on the grounds that location-specific economic rents (which arise when businesses set up operations in specific countries because of abundant natural resources, cheap labour costs and existing equipped infrastructure) was central, labour mobility was high, there was strong resistance to capital gains taxes, and tax avoidance would accelerate with a change to the system.

3. Abolition of business depreciable assets tax in France

In France, business depreciable assets were subject to a professional tax (Taxe Professionnelle: established in 1975). The professional tax was a main local tax, and in 2009 accounted for about 30% of local tax revenue. However, since President Jacques Chirac’s 2004 announcement that the tax would be abolished, movements toward the abolishment of the tax sped up, and under the 2010 Finance Act, the local economy tax (Contribution Économique Territoriale) replaced the professional tax.

Reasons given for the abolition of the professional tax were that, before the reform, about 80% of tax base for the professional tax was the asset value of business depreciable assets and was thought to inhibit business investment and employment, and taxes on business depreciable assets did not exist in other EU nations, hindering international competitiveness.

First, the professional tax has an effect to raise business management costs and constrain investment. These effects are big in capital-intensive industries such as the manufacturing industry, loss-making corporations and new businesses.

In regard to the investment constraint effect, it is necessary to also investigate the influence on French investment by foreign companies and choice of local business production bases. First of all, the professional tax puts a relatively heavy burden on capital-intensive industries, lowering the international competitiveness (cost competitiveness) of such industries. There is a possibility that companies, in order to lower production costs, will invest directly overseas or increase their number of overseas subcontractors. It is fact that, in France, cost competitiveness has fallen since the 1990s. However, it is believed that the main cause for this is a rise in wage costs. Also, according to a survey, as motives for moving production activities overseas, manufacturing companies rated the cheap labour costs, close proximity to customers, and lax regulations above tax system (corporate income tax, professional tax).

In regards to foreign investment in France, due to the non-existence of business depreciable assets taxes in other EU nations, it was feared that would lose its appeal as a target for investment. However, in reality, investment in France remains smooth. The effective average tax rate of company taxation (income taxes and property taxes) in France, is the highest among the 27 EU nations, and while being a negative primary factor for business location, it is believed that France has more positive factors (high infrastructure standards and a high quality workforce), making it a desirable location for foreign investment.

Second, there is a possibility that the professional tax, through a drop in labour productivity, direct investment overseas and increasing number of overseas subcontractors, will constrain employment. When looking at industry-specific employment figure changes since 1990, employees in the manufacturing industry have actually dropped in number. Reasons for this include outsourcing to foreign firms and partially shifting production activities overseas, but it is unclear how much of an influence the professional tax had on those.

4. Conclusion—Policy implications for Japan—

The New Zealand debate presents several viewpoints and issues on capital income taxation reform. First of all, when discussing economic globalization, it is necessary to watch labour mobility in addition to capital flow. When tax rates for labour income are relatively high, high-paid highly skilled workers are encouraged to move overseas, possibly bringing about a drop in productivity by domestic firms. Second, in regards to corporate income tax, it is necessary to monitor trends in corporate income tax rates in foreign countries and study the effects a corporate income tax rate change has on capital flow and the outflow of profits overseas. Third, tax avoidance through investment entities should also be included as a subject of investigations. Fourth, it is necessary to analyze the content and scale of economic rents. Location-specific economic rents are not influenced much by change in corporate income tax rate, but relatively weighty taxes on firm-specific economic rents, which come up when businesses conduct operations at a base in a specific country and expand their global business, will be a primary factor in businesses going overseas or preventing foreign businesses from entering Japan.

The French debate brings to the fore the problem of depreciable assets taxes. In Japan, business depreciable assets are subject to a fixed assets tax, but in recent years the economic world has been calling for its abolition or reduction (e.g. Japan Business Federation Desirable Local Corporate Tax System, 2013). However, it is premature to think that it should also be abolished in Japan, just because it has been abolished in France. In Japan, analysis into the true state of depreciable assets tax and its effects is insufficient. Without this work, debate into how to tax depreciable assets would be difficult. A higher level of research is desirable.

References
  • Shinohara, M. (2009), “Business Depreciable Assets and Fixed Assets Tax-To Be Based on France’s Fouquet Commission Report” , Local Taxes, Institute of Local Finance, Vol. 60, No.7, pp.48-61. (in Japanese)
  • Shinohara, M.(2012), “New Zealand Capital Income Tax Reform-Examining the Debate Surrounding the 2010 Tax Reform” , Securities Tax Reform Issues, Japan Securities Research Institute, Chap. 5. (in Japanese)
  • Shinohara, M. (2013), “France’s 2010 Professional Tax Reform-Reform Background and Effects on Business” , IERCU Discussion Paper, No.202new window, Institute of Economic Research, Chuo University. (in Japanese)
Masahiro Shinohara
Professor of Public Finance and Tax Policy, Faculty of Economics, Chuo University
Born in Kagoshima City in 1957. Completed doctoral program majoring in applied economics in the Graduate School of Economics, Waseda University. Holds PhD. (Economics).
Entered current position in 2002 after working as a full time lecturer and assistant professor in the Faculty of Real Estate Sciences, Meikai University and assistant professor at Chuo University.
Major publications include Juutakuzeiseiron (Housing Tax System) (sole author, Chuo University Press, 2009), Fudosanzeisei no Kokusaihikakubunseki (International Comparative Analysis of Real Estate Tax Systems) (sole author, Seibunsha co., ltd. publishers, 1999), Shoukenzeiseikaikaku no Ronten (Securities Tax Reform Issues) (multiple authors, Japan Securities Research Institute, 2012), Kinyushotokukazei no Kihon Mondai (Basic Problems of Financial Income Taxes) (multiple authors, Japan Securities Research Institute, 2008), Nigentekishotokuzei no Ronten to Mondaiten (Dual Income Tax Issues and Problems) (multiple authors, Japan Securities Research Institute, 2004), and Chiho Koufuzei Nani ga Mondai Ka (Local Allocation Taxes What’s the Problem?) (multiple authors, Yuhikaku Publishing co., ltd., 2003), etc.