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Corporate Taxation and Regional Economic Development in Japan: A Panel Analysis of Prefectural-Level Data

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Industrial Location and Vitalization of Regional Economy
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Abstract

Japan’s Business Location Promotion Law was enacted with the aim of revitalizing regional economies through decentralized industrial growth. This paper analyzes the effect of corporate tax policy—modeling tax burden as the marginal effective tax rate (METR) at the prefectural level—on regional economic development by estimating its impact on firms’ decisions about where to locate new facilities. The key findings can be summarized as follows: (1) The effect of corporate taxation on regional economic development—modeled as employment in the manufacturing sector—is significantly negative at the national level. However, when the country is split into two categories—Japan’s three major metropolitan areas versus all other prefectures (“provincial regions”)—the effect is not statistically significant in either category. (2) Several independent variables unrelated to tax burden also influence regional economic development. Notably, market characteristics—modeled as population size—has a significantly positive effect both at the national level and separately within each regional category. The nationwide model indicates that the effect of market characteristics is considerably larger than that of corporate taxation. (3) The public service of highway infrastructure has a significantly positive impact on manufacturing employment within Japan’s three major metropolitan areas.

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Notes

  1. 1.

    Matsubara and Kamakura (2020), p. 219.

  2. 2.

    Act on Formation and Development of Regional Industrial Clusters through Promotion of Establishment of New Business Facilities.

  3. 3.

    Act on Strengthening a Framework for Regional Growth and Development by Promoting Regional Economy Advancement Projects.

  4. 4.

    See Due (1961), p. 171.

  5. 5.

    In the Japanese context, an inter-region analysis would compare trends in different prefectures, while an intra-region analysis would compare trends between different municipalities within a specific prefecture.

  6. 6.

    The four-year interval was chosen (i.e., 2019 was selected instead of 2020) because at the time during which the study was performed, 2018 was the latest year for which real capital stock data were available needed to estimate the METR.

  7. 7.

    In Japan, “the three major metropolitan areas” (san-daitoshi-ken) refers to the three largest metropolises in the country and their neighboring prefectures, which are heavily urbanized with interconnected economies, i.e., the Tokyo Metropolitan Area (Tokyo, Kanagawa, Saitama, Chiba, Ibaraki), the Nagoya Metropolitan Area (Aichi, Gifu, Mie), and the Osaka Metropolitan Area (Osaka, Hyogo, Kyoto, Nara, Wakayama). Government data collected since 2000 indicated that businesses are increasingly choosing to locate new factories in these three giant conurbations (2000: 27.2%, 2005: 34.3%, 2010: 37.3%, 2015: 40.0%, 2020: 42.6%; Survey of Factory Location Trends, METI).

  8. 8.

    See Wasylenko (1997), p. 39.

  9. 9.

    This categorization scheme was drawn exclusively from the works of Wasylenko (1981, 1997).

  10. 10.

    It stands to reason that information and travel costs would consume a greater percentage of earnings for smaller enterprises, which may be one reason why small business owners may limit their options to familiar areas. See Wasylenko (1981), p. 160.

  11. 11.

    See Fukazawa (2020), p. 43.

  12. 12.

    See Wasylenko (1981), p. 157.

  13. 13.

    Technology-intensive industries tend to locate preferentially in areas with higher population densities and higher levels of worker education. Arauzo-Carod et al. (2009), p. 703.

  14. 14.

    For detailed information on how the METR is defined, see Devereux (2003), p. 7.

  15. 15.

    See Nakata (2016), p. 7.

  16. 16.

    Since FY2004, ordinary corporations with capital exceeding 100 million yen are subject to pro forma standard taxation (a.k.a. “size-based corporate taxation”), which consists of a value-added levy (based on total remuneration plus net interest/rent expenses) and a capital levy (based on total capital stock, etc.), in addition to an income levy (based on corporate income). Roughly 1% of all corporate entities in Japan are subject to pro forma standard taxation.

  17. 17.

    For details on how the present discounted value of the preferential treatment of investments A, discount rate ρ, and economic depreciation rate δ are estimated, see Iwata et al. (1987).

  18. 18.

    If land price (LP) were not included in the regression model, the value of the coefficient for the METR (TAX) would reflect the net effect excluding capitalization.

  19. 19.

    Gabe and Bell (2004) identified an important trade-off in fiscal policy in this regard: when municipalities seeking economic growth try to attract businesses by cutting taxes, public services suffer as a consequence, which dampens economic growth in turn.

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Correspondence to Masahiro Shinohara .

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Shinohara, M. (2023). Corporate Taxation and Regional Economic Development in Japan: A Panel Analysis of Prefectural-Level Data. In: Ishikawa, T., Nakamura, D. (eds) Industrial Location and Vitalization of Regional Economy. Springer, Singapore. https://doi.org/10.1007/978-981-19-8128-9_2

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