Saturday, September 23, 2023
Homedavos world economic forum 2014Stiglitz: Japan's '3 arrow' plan has 1 big problem

Stiglitz: Japan’s ‘3 arrow’ plan has 1 big problem

Japan's efforts to revitalize itself after more than a decade of stagnation have global policy leaders abuzz and hopeful that the nation can turn around its fortunes.

One measure, though, is drawing some doubt: a move toward lowering corporate income taxes in hopes that the savings companies experience will be reinvested in the economy.

Nobel Prize-winning economist Joseph Stiglitz is one such skeptic, believing that corporations would use the windfall for their own benefit.

"We're talking about how they're (going to) raise the consumption tax … and lower the corporate income tax and pray that the good corporations here will all use the extra revenue to give wage increases," Stiglitz said at the World Economic Forum in Davos, Switzerland. "I know in America it almost surely would not happen. It would show up in bigger corporate bonuses."

US economist Joseph StiglitzJoseph Lago | AFP | Getty Images

Japan and the U.S. have high corporate taxes in common: They rank first and second, respectively, on a global scale, and both have made moves toward reducing the burden.

(More from Davos: Europe's recession may be over, but now what?)

In Japan's case, the government last year approved a modest cut to 35.64 percent, a shade above the U.S. rate of 35 percent.

The reduction is part of the "Three Arrows" approach that Prime Minister Shinzo Abe is taking toward revitalizing the country's economy. The proposals are more commonly known as Abenomics.

(Read more: Is the Japan story getting threadbare?)

In the U.S., President Barack Obama and Congress have been bickering over conditions under which a decrease would be approved. The president wants corporate tax cuts to be tied to spending for job-creation programs.

The thinking in both cases is that tax cuts free up capital for investment, and at least one Japanese businessman said he's on board.

Yoshiaki Fujimori, president and CEO of LIXIL Group in Japan, said he supports Abe's efforts to get more money in consumers' pockets to help drive demand. Japan has been mired in deflation for years, with the most recent inflation reading of 1.2 percent representing some actual improvement toward growth.

(Read more: Japan's PM issues veiled threat to China over arms race)

Abe's first two arrows were loosening monetary policy and implementing more responsible fiscal policy to roll back huge deficits. The third is structural reform to develop lasting growth policies.

"The first two arrows worked well. It seems Mr. Abe is determined to make the third arrow work well," Fujimori said. "Most companies are committed to raise the wage. The third arrow is long term."

—By CNBC's Jeff Cox. Follow him on Twitter @JeffCoxCNBCcom.


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