Estimating the Effect of Local Allocation Tax Grants on Local Tax Collection Rates:Verifying the Effect of the Administrative Reform Incentive Assessment and the Distortion Underlying Local Allocation Tax Grants (in Japanese)

As part of the Trinity Reform, the Japanese Ministry of Internal Affairs and Communication (MIC) established the Administrative Reform Incentive Assessment (ARIA) program under the local allocation tax (LAT) system during the fiscal year of 2005. This program was aimed at motivating local governments with LAT grants to raise their tax collection rates (TCRs), since a number of economists had asserted that LAT grants eroded the fiscal discipline of local governments. Our paper uses empirical methods to estimate the effect of the ARIA program and of the distortion underlying LAT grants on the fixed asset tax for land. The major results are follows. First, the ARIA does not stimulate local governments to improve their TCRs with respect to the fixed asset tax. It seems that the amount of the ARIA is insufficient to improve their TCRs, and, furthermore, that the ARIA is not widely appreciated by local governments. Second, the TCRs of local governments with LAT grants were 0.16%~0.18% higher than the TCRs of those that did not. This result implies that local governments with the grants have excessive incentives to collect taxes because the LAT system compensates these authorities for a portion of shrinking their tax base.