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

Kazuki Onji

    Research output: Contribution to journalArticle

    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.
    Original languageEnglish
    Pages (from-to)766-775
    JournalJournal of Public Economics
    Volume93
    Issue number5-6
    DOIs
    Publication statusPublished - 2009

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