Corporate Tax Increases and Shareholder-Level Capital Income Tax Neutrality in Japan -An Analysis of Fundamental Reforms Using Effective Tax Rates-

Although Japan is considering increasing the corporate income tax rate, the tax base requires reforms to maintain or lower the effective tax rate from an economic perspective. In this case, capital income tax at the shareholder and corporate levels is important. This study focuses on financing neutrality and analyzes it using forward-looking effective tax rates. The reform proposals are the Comprehensive Income Business Tax (CBIT), Allowance for Corporate Equity (ACE), and Allowance for Corporate Capital (ACC). This study reveals that the CBIT ensures financing neutrality at both the corporate and shareholder levels but raises the cost of capital, effective marginal tax rate (EMTR), and effective average tax rate (EATR). In contrast, ACE/ACC lowers the costs of capital, EMTR, and EATR. At the corporate level, the ACC is more financing neutral than the ACE, though these policies have similar financing neutrality at the shareholder level. Therefore, whether to adopt the ACE or ACC depends on the practical perspective. In this regard, many countries adopt the ACE, and there is room for consideration as tax rates in Japan increase.