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

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  • Onji, Kazuki

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 93 (2009)
Issue (Month): 5-6 (June)
Pages: 766-775

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Handle: RePEc:eee:pubeco:v:93:y:2009:i:5-6:p:766-775

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Web page: http://www.elsevier.com/locate/inca/505578

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Keywords: H32 H25 L22 Tax avoidance Business group Value-added tax Firm size distribution;

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Cited by:
  1. Paul E. Carrillo & M. Shahe Emran & Anita Rivadeneira, 2011. "Do Cheaters Bunch Together? Profit Taxes, Withholding Rates and Tax Evasion," Working Papers 2011-03, The George Washington University, Institute for International Economic Policy.
  2. Kazuki Onji, 2008. "The Response of Firms to Eligibility Thresholds: Evidence from the Japanese Value-Added Tax," Asia Pacific Economic Papers 370, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
  3. Jonathan Goyette, 2012. "Optimal tax threshold: the consequences on efficiency of official vs. effective enforcement," Cahiers de recherche 12-07, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  4. Chang-Tai Hsieh & Benjamin A. Olken, 2014. "The Missing "Missing Middle"," NBER Working Papers 19966, National Bureau of Economic Research, Inc.

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