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This past week, Japanese head honcho Naoto Kan and his samurai soldiers proposed a tax package that would slice and dice the corporate tax rate, in hopes of spicing up the Japanese economy.

At 40.69%, Japan has one of the higher corporate tax rates across the world and is a major obstacle for Japanese companies trying to survive.

Remember, Kan is part of the Democratic Party of Japan, which has stated that it wants Japan to shift from being an export-based economy to a nation more dependent on its local industries.

Countries Corporate Tax Rate

According to Kan, introducing a tax cut of 5% that will aim to boost employment and capital spending from local corporations will be the first step towards achieving the party’s goal.

Of course, this is just one part of all the tax changes that the government plans to implement. Now, let’s get down and dirty and see what else Kan has planned for Japan.

In addition to the corporate tax cut, the national tax rate on small companies will be cut down to 15% from 18% in an effort to convince the average businessmen to up their hiring.

The Japanese government will allow small companies to further reduce their taxes by 200,000 JPY per person if they hire more than five people or if they increase their payroll by 10% or more. Pretty sweet eh?

Then to encourage investors to buy Japanese stocks, the government will keep the tax on stock dividends and capital gains steady at 10% until 2013, as opposed to the initial proposal which was to push the rate go back up to 20% in 2012.

Of course, all these incentives come at a price. The tax cuts could make Japan’s budget deficit larger since less money will flow into the government coffers.

The current estimate is that the Japanese government stands to lose roughly 1.5 TRILLION JPY in revenues. That’s a whole lot of money! How can Kan make up for all that lost moolah?

Finance Minister Noda said that part of the solution would be to increase money collected from higher-earning individuals.

There are proposals that corporate executives who receive more than 15 million yen annually should incur a maximum deduction of 2.45 million JPY. Deductions function as taxes in Japan as the government collects higher amounts when incomes increase.

The government is also looking to increase environmental tax, with the goal of charging an additional 37% on petroleum use.

While yet to be finalized and approved, according to the DPJ, the tax package’s goal is to drive up domestic demand and stimulate some much-needed inflation. The tax package is expected to add at least 0.33% to Japan’s GDP next year.

All things considered, I believe the DPJ’s move is a step in the right direction.

While the tax revision is small, it will certainly help businesses have more money in their pockets for reinvestment, especially with Japan struggling very hard to climb out of the deflationary pit. Japan needs all the help it can get… No matter how little.