This research by Yohei Kobayashi of the Research Institute of Economy, Trade and Industry, Yasuo Baba and Kimimitsu Sato of Mitsubishi UFJ Research and Consulting empirically analyzes the impact of Japan's corporate tax reform from 2014 to 2018 on firm dynamics.
Key Points
1. Characteristics and Background of Japan's Corporate Tax Reform
- Tax Rate Transition: Statutory effective tax rates declined from 39.54% for large enterprises and 40.87% for SMEs in FY2011, to 29.74% for large enterprises and 33.59% for SMEs in FY2018
- Reform Uniqueness: While other countries reduced income tax rates and expanded tax bases, Japan expanded tax bases through size-based taxation (value-added taxation and payroll taxation)
- Analysis Period: Focused on FY2014 to FY2018, when impacts from the Great East Japan Earthquake and COVID-19 were minimal
- Problem Awareness: Despite tax rate reductions, equipment investment and wage increases did not progress as expected
2. Analysis Using Forward-Looking Effective Tax Rates
- Methodological Features: Developed new effective tax rate indicators incorporating size-based taxation
- Changes in Tax Burden: Companies with previously high tax burdens experienced greater effective tax rate reductions, leading to tax burden leveling
- Impact by Firm Characteristics:
- Large enterprises and high-productivity firms: Large tax rate reductions
- Firms with high labor share and "zombie companies": Tax rate increases
- Analytical Methods: Used average effective tax rates (based on overall corporate profits) and marginal effective tax rates (after-tax present value of investments)
3. Empirical Results on Corporate Tax Reform Effects
- Overall Effects: Tax rate reductions had statistically significant effects of increasing tangible fixed assets, employee numbers, and labor costs
- Effects by Firm Size:
- SMEs: Large effects from tax rate reductions
- Large enterprises: Smaller effects than SMEs
- Impact of Size-Based Taxation: Value-added tax average effective rate coefficients were larger in absolute value than income tax coefficients, offsetting reform effects
- Quantitative Results: All coefficients in Table 3 estimation results were negative and statistically significant
4. Policy Implications
- First Implication: Corporate tax reform overall had effects of increasing investment and employment, contributing to achieving initial policy objectives
- Second Implication: Effects on large enterprises were smaller than on SMEs, mainly due to expansion of size-based taxation
- Policy Design Issues: Simultaneous implementation of statutory effective tax rate reductions and size-based taxation expansion created a "pressing accelerator and brake simultaneously" situation
- Impact on Wage Increases: Expansion of size-based taxation had negative effects on labor costs, hindering wage increases, a key challenge for the Japanese economy
This research empirically reveals structural problems in Japan's corporate tax reform and suggests the need for careful consideration of size-based taxation treatment in future tax reforms.