Tax Law Asymmetries and Income Shifting: Evidence from Japanese Capital Keiretsu

Kazuki Onji, David Vera

    Research output: Contribution to journalArticle

    Abstract

    While the asymmetric treatment of positive and negative income creates clear tax incentives to shift income among a group of closely related corporations, attempts to document the impact of such behavior on economic outcomes are relatively sparse. We aim to provide evidence on taxmotivated transfers from a large dataset of Japanese corporate groups. Using company level data on 33,340 subsidiary time pairs from 1988, 1990, and 1992, we consider testable implications of income shifting in a theoretical model tailored to the Japanese institution of the early 1990s and empirically examine the spread of the profitability distribution, the attrition rate of loss-making subsidiaries, and the propensity to report zero profit. The findings suggest that income shifting was pervasive when Japan had not adopted a formal allowance for group-level tax. The result underscores the importance of accounting for the inter-relatedness of companies, in designing a corporate income tax.
    Original languageEnglish
    Pages (from-to)1-33
    JournalThe BE Journal of Economic Analysis & Policy
    Volume10
    Issue number1
    Publication statusPublished - 2010

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