On June 27, 2022 the Japanese Ministry of Finance published PRI (Policy Research Institute) Discussion Paper Series (No.22A-02) titled: “Tax Avoidance or Compliance Costs Avoidance? Evidence from VAT Reforms in Japan” on its website. The discussion paper was drafted by Takafumi Kawakubo (London School of Economics), Takafumi Suzuki (Aichi Shukutoku University) and Kohei Asao (Japanese Ministry of Finance). The discussion paper disentangles the motivations behind how enterprises respond to size-dependent tax regulations by exploiting the VAT reforms in Japan.


In Japan, both tax threshold and tax rate have been changed over the past 3 decades since the introduction of VAT. The authors built on the model of Harju et al. (2019) to incorporate various tax reforms and derive empirically testable implications. By using a panel of Japanese Census of Manufacture covering the period over VAT introduction and reforms the authors conducted bunching estimation. According to the authors the local estimates imply that the observed response by enterprises is mainly caused by compliance costs rather than tax rates for small enterprises in Japan.


The main findings and contributions of the authors are as follows:

1.  Following the existing literature, the authors observed clear bunching below the tax threshold and generated excess bunching estimates;

2.  The authors find that the bunching estimates are persistently larger for sole proprietors than for firms;

3.  The authors apply the theoretical implications to estimate tax elasticity and compliance costs and find that compliance costs are dominant in determining enterprise responses.


The authors come to the overall conclusion that the result of their research suggests that easing compliance costs could be more effective support for small enterprises rather than reducing tax rate/burden.


PRI Discussion Paper Series (No.22A-02) as published on the website of the Japanese Ministry of Finance can be found here.




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