Can the ruling coalition's tax reform plan prompt businesses and households to make aggressive investments?
The Liberal Democratic Party and its coalition partner Komeito have approved an outline of tax system reform for fiscal 2020, which emphasizes measures to spur economic growth.
Encouraging the utilization of surplus corporate funds was a focal point, so tax breaks will be introduced for investments in emerging companies. If investments are made in firms that meet certain conditions -- such as being less than 10 years old, independent and not yet listed -- 25% of the amount of the investment will be deducted from taxable corporate income.
It is understandable that the outline is aimed at rectifying Japanese firms' deep-seated principle of self-sufficiency and at advancing a so-called open innovation program that utilizes the knowledge of different types of business.
The planned tax relief will apply only to investments exceeding a certain amount and it will be made mandatory for the investing firms to hold stock in the emerging firms for five years. It makes sense that the measure is intended to prevent speculative investments aimed at short-term profits.
As a measure to help encourage investments, tax breaks will be provided for telecommunication companies and others to accelerate the expansion of next-generation communication networks known as the fifth-generation, or 5G, wireless communication system. The measure makes it possible to deduct 15% of the amount of investment from corporate tax. The deduction was originally planned to be set at 9%, but it was later expanded greatly.
Japan lags countries such as the United States and China in the establishment and expansion of 5G networks capable of high-speed and large-capacity communication and in the development of 5G-related equipment. The planned tax relief will apply only to companies and other entities that move up investment schedules, thereby accelerating the expansion of 5G communication networks.
With a view to building a safe and highly reliable communication network, a new system will also be established under which the government designates companies and entities eligible for the envisioned tax relief measures.
The task to be tackled is to make the new tax system work effectively.
There are already tax relief measures in relation to plant and equipment investment, research and development and wage hikes. Despite this, firms have yet to become aggressive in conducting business. It is necessary to analyze the factors behind this and use the results to have the effects of the new tax system widely sink in.
For the promotion of the open innovation program, it will become necessary to carry out such measures as deregulation and encouraging the mobility of human resources. It is desirable to implement various measures, aimed at bolstering the vigor of the private sector, in an integrated manner.
A measure to induce a shift of household financial assets from savings to investments is also important. The tax exemption scheme for investment by individuals, popularly known as general NISA (Nippon Individual Savings Account), will be reexamined.
A scheme will be created under which up to 200,000 yen may be invested in financial products, including low-risk investment trusts, with any resulting profits being exempt from tax. It will be a "two-level" system in which those who fully use this scheme will become eligible to put an additional amount of up to 1.02 million yen a year into stocks and other moderately riskier financial products, again with any resulting profits tax-free.
The general NISA is criticized as not contributing to asset accumulation by individuals because the scheme is used only for short-term stock transactions.
The establishment of the 200,000 yen quota for low-risk investment will curb participation in the scheme by individuals interested in speculative investment and prompt long-term and dispersed investment.
With an eye on the era of 100-year life spans, accumulating assets for one's post-retirement life is an important task. The government should listen to the voices of the people as well and work toward improving the tax exemption system so as to make it more convenient for them.
-- This article appeared in the print version of The Yomiuri Shimbun on Dec. 13, 2019.
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