The Impact of Tax Rate Changes on the Implicit Tax Burden of Corporations

Abstract

　The purpose of this paper is to empirically elucidate whether changes in corporate tax rates in Japan have impacted firms’ implicit tax burdens. Previous studies have shown that changes in corporate tax rates function as a motivation for income shifting. However, the effects on the explicit tax burden reduction through income shifting and the pre-tax return on investment, which constitutes the implicit tax burden at the firm level, have not been thoroughly examined. Therefore, this paper examines whether the gradual reduction in corporate tax rates, viewed as tax incentives, has influenced firms’ implicit tax burdens. The analysis reveals that a reduction in firms’ explicit tax burdens, i.e., a decrease in corporate tax rates, is associated with a decrease in pre-tax profits. Additionally, contrary to the theoretical mechanism that a change in corporate tax rates would result in general implicit taxes, it was found that the pre-tax profits at the firm level increased when corporate tax rates were altered. This can be interpreted as a decrease in investment due to income shifting caused by the tax rate reduction. Implicit taxes are an important consideration not only for corporate taxpayers but also for policymakers aiming to achieve improvements in corporate value and productivity. This paper contributes to tax accounting research and policy formulation by examining the implicit taxes at the firm level, an area that has not been previously investigated in Japan, from the perspective of tax rate changes.