Evaluating Japan's corporate income tax reform using firm-specific effective tax rates

Abstract

This study evaluates Japan's corporate tax reforms in the 2010 s by estimating the effective average tax rate (EATR) and effective marginal tax rate (EMTR), common methods for international comparisons, using data on Japanese firms. Japan lowered its statutory tax rate while it expanded the tax base. This study analyzes the differing effects of the tax rate reduction and depreciation method reform by conducting simulations to represent the effects of each reform on the EATR and EMTR. Japan's tax reform in the 2010 s reduced both EATR and EMTR by lowering tax rates. The reform of depreciation methods had little effect on EATR and raised EMTR, but had a limited effect on companies with eligible depreciable assets. The overall effect of the corporate income tax reform is that the effect of the tax rate reduction exceeded that of the depreciation method reforms, and thus the EMTR also declined.