A paper published in the Ministry of Finance Policy Research Institute's "Financial Review" Issue 160. Professor Takero Doi and his research team conducted a comprehensive analysis of loss-making corporations (deficit corporations) in Japan using individual corporate tax return data.
Key Points
1. Research Overview
- Authors: Takero Doi (Keio University), Shunichiro Bessho (Waseda University), Katsuki Mori (Former Education Officer, Tax College Research Department)
- Research Subject: Empirical analysis of loss-making corporations based on corporate tax return data
- Research Question: Understanding the phenomenon where approximately 70% of Japanese corporations are loss-making
- Data: Individual corporate tax return data (anonymized)
2. Data Characteristics
- Data Scale: Tax return data for all corporations (approximately 3 million companies)
- Information Detail:
- Major financial statement items
- Detailed loss information
- Corporate attributes (capital, industry, establishment year, etc.)
- Time Series: Panel data covering multiple years
- Coverage: Virtually all corporations excluding dormant companies
3. Distribution of Loss-Making Corporations by Income and Loss Amount Classes
- Loss-Making Corporation Ratio:
- Approximately 70% of all corporations are loss-making
- Consistently high levels
- Loss Amount Distribution:
- Small-scale losses constitute the majority
- Corporations with massive losses are few
- Loss Carryforward:
- Long-term accumulation
- Impact of deduction restrictions
4. Distribution by Corporate Tax Amount Classes
- Characteristics of Tax-Paying Corporations:
- Approximately 30% of total
- Concentrated among large corporations
- Stable revenue base
- Tax Revenue Contribution:
- Tax revenue concentration among top corporations
- Limited contribution from SMEs
- Effective Tax Rate Reality: Burden rate after loss deduction
5. Distribution of Loss-Making Corporations by Capital Classes
- Patterns by Size:
- Higher loss-making corporation ratio among SMEs
- Certain proportion exists even among large corporations
- Discontinuity around 100 million yen capital
- Relationship with Business Reality:
- Impact of paper companies
- Deficit reporting for tax saving purposes
- Presence or absence of substantial business activities
6. Distribution of Loss-Making Corporations by Industry
- Inter-Industry Disparities:
- High loss rates in service and retail industries
- Relatively low in manufacturing
- Peculiarities of real estate industry
- Industry Characteristic Effects:
- High or low entry barriers
- Economic sensitivity
- Presence or absence of regulations
7. Distribution by Family vs. Non-Family Companies
- Family Company Characteristics:
- Higher loss-making corporation ratio
- Possibility of income adjustment
- Relationship with executive compensation
- Non-Family Companies:
- Relatively lower loss rates
- Effect of external monitoring
- Governance Impact: Degree of separation between ownership and management
8. Dynamics Between Loss-Making and Profit-Making Corporations
- State Transition Analysis:
- Probability of transition from loss to profit
- Probability of falling from profit to loss
- State persistence
- Corporate Life Cycle:
- Loss period after establishment
- Profitability in maturity
- Characteristics of decline phase
- Policy Change Impact: Response to tax reform
9. Conclusions and Policy Implications
- Major Findings:
- Heterogeneity of loss-making corporations
- Structural and cyclical factors
- Possibility of tax avoidance
- Policy Implications:
- Corporate tax system challenges
- Review of SME tax system
- Strengthening tax enforcement
- Future Research Topics:
- Longer-term panel analysis
- International comparative studies
- Clarification of microeconomic foundations
This research empirically reveals the structural challenges facing Japan's corporate tax system and provides groundbreaking results offering important implications for future tax reform discussions.