The response of firms to eligibility thresholds: Evidence from the Japanese value-added tax

Kazuki Onji ()

Journal of Public Economics, 2009, vol. 93, issue 5-6, pages 766-775

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: H32; H25; L22; Tax; avoidance; Business; group; Value-added; tax; Firm; size; distribution (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:pubeco:v:93:y:2009:i:5-6:p:766-775

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