Tax Avoidance by Capital Reduction: Evidence from Corporate Tax Reform in Japan

45 Pages Posted: 22 Jan 2018 Last revised: 17 Jun 2018

See all articles by Kaoru Hosono

Kaoru Hosono

Gakushuin University - Economics

Masaki Hotei

Daito Bunka University - Department of Economics

Daisuke Miyakawa

Hitotsubashi University

Date Written: June 11, 2018

Abstract

A new size-dependent tax system was introduced in Japan on April 1, 2004. We exploit this exogenous institutional change as a natural experiment and empirically examine how firms endogenously reacted to a size-dependent tax system in terms of both financial and real activities. Using a large-scale firm-level data over the period from 1996 to 2006, we test several hypotheses obtained from our theoretical model based on financial constraints faced by firms. From our empirical analyses, we obtain the following results that are consistent with the theoretical model. First, firms that originally held stated capital above the threshold set by the new tax system were more likely to reduce their stated capital to the threshold’s level or below after the announcement of the new tax system. Second, firms with lower labor productivity, and smaller asset size were more likely to do so. Finally, firms that reduced their stated capital showed ex-post lower growths in asset size and sales, and the magnitude of which became larger over time. These results suggest that the size-dependent policy induced endogenous capital reduction of a group of firms, which resulted in their lower growth.

Keywords: Tax avoidance; Pro forma standard taxation; Firm growth

JEL Classification: H32, H25, L25

Suggested Citation

Hosono, Kaoru and Hotei, Masaki and Miyakawa, Daisuke, Tax Avoidance by Capital Reduction: Evidence from Corporate Tax Reform in Japan (June 11, 2018). Asian Finance Association (AsianFA) 2018 Conference. Available at SSRN: https://ssrn.com/abstract=3105794 or http://dx.doi.org/10.2139/ssrn.3105794

Kaoru Hosono

Gakushuin University - Economics ( email )

1-5-1 Mejiro, Toshima-ku
Tokyo 171-8588
Japan

Masaki Hotei

Daito Bunka University - Department of Economics ( email )

Takashimadaira 1-9-1, Itabashi
Tokyo 175-857
Japan

Daisuke Miyakawa (Contact Author)

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

Register to save articles to
your library

Register

Paper statistics

Downloads
32
Abstract Views
186
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information