The Response of Firms to Eligibility Thresholds: Evidence from the Japanese Value-Added Tax

Journal of Public Economics, Vol. 93, No. 5-6, pp. 766-775, June 2009

Posted: 29 Mar 2007 Last revised: 11 May 2009

See all articles by Kazuki Onji

Kazuki Onji

Australian National University - Crawford School of Economics and Government

Date Written: June 1, 2009

Abstract

It is common to define benefit eligibility for small business policies by restrictions on the firm size. This paper documents the effects of the value-added tax (VAT) threshold in Japan, focusing on the incentives for a large firm to “masquerade” as many small firms by separately incorporating business segments. A comparison of the corporate size distributions before and after the VAT introduction of 1989 shows a clustering of corporations just below the threshold—a pattern that is attributable to the behavioral responses. To rule out the confounding influences of the changes in the company attributes over the years, we applied a semiparametric density decomposition technique developed by DiNardo, Fortin, and Lemieux (DiNardo J., Fortin N.M., Lemieux T., Labor market institutions and the distribution of wages, 1973–1992: a semiparametric approach. Econometrica 1996; 64; 1001–1044). This study suggests that the masquerading behavior by firms may be commonplace in other settings.

Keywords: Tax avoidance, Business group, Value-added tax, Firm size distribution

JEL Classification: H32, H25, L22

Suggested Citation

Onji, Kazuki, The Response of Firms to Eligibility Thresholds: Evidence from the Japanese Value-Added Tax (June 1, 2009). Journal of Public Economics, Vol. 93, No. 5-6, pp. 766-775, June 2009. Available at SSRN: https://ssrn.com/abstract=976833

Kazuki Onji (Contact Author)

Australian National University - Crawford School of Economics and Government ( email )

Building #132
Australian National University
Canberra 0200
Australia

HOME PAGE: http://www.crawford.anu.edu.au/staff/konji.php

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