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The efficiency consequence of a political compromise in the Japanese tax reform of 1989

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  • Onji, Kazuki

Abstract

A political compromise left defects to the initial design of a value-added tax introduced to Japan in 1989. This paper assesses the efficiency consequence of that political decision. We estimate revenue drains arising from tax-motivated divestures to infer maximum possible efficiency losses from behavioral responses. The estimation utilizes variations in tax incentives arising from the new tax and its amendments. The sample is 7619 subsidiaries founded from January 1985 through December 1998. The results indicate that the tax influenced 10.7–12.7 percent of new subsidiaries incorporated during a high-tax-incentive regime. The behavioral response accounted for 3.4 percent of the overall revenue drain. The modest amount of revenue drain suggests that firms faced coordination problem in separating business segments, and that firms with low costs of reorganization responded.

Suggested Citation

  • Onji, Kazuki, 2014. "The efficiency consequence of a political compromise in the Japanese tax reform of 1989," Japan and the World Economy, Elsevier, vol. 31(C), pages 54-64.
    • Handle: RePEc:eee:japwor:v:31:y:2014:i:c:p:54-64
    DOI: 10.1016/j.japwor.2014.05.001
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    References listed on IDEAS

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    1. Goolsbee, Austan & Maydew, Edward, 2002. "Taxes and Organizational Form: The Case of REIT Spin-Offs," National Tax Journal, National Tax Association;National Tax Journal, vol. 55(3), pages 441-456, September.
    2. Keen, Michael & Mintz, Jack, 2004. "The optimal threshold for a value-added tax," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 559-576, March.
    3. Onji, Kazuki, 2009. "The response of firms to eligibility thresholds: Evidence from the Japanese value-added tax," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 766-775, June.
    4. Scholes, Myron S & Wolfson, Mark A, 1990. "The Effects of Changes in Tax Laws on Corporate Reorganization Activity," The Journal of Business, University of Chicago Press, vol. 63(1), pages 141-164, January.
    5. Ishi, Hiromitsu, 2001. "The Japanese Tax System," OUP Catalogue, Oxford University Press, edition 3, number 9780199242566.
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    More about this item

    Keywords

    Value-added tax; Corporate divesture; Tax avoidance;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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