Empirical Studies on Effect of Property Tax on Capital Investment

Author Name KOBAYASHI Yohei (Consulting Fellow, RIETI) / SATO Motohiro (Faculty Fellow, RIETI) / SUZUKI Masaaki (Senshu University)
Creation Date/NO. November 2018 18-J-031
Research Project Economic Analysis of Property and Reform Proposal
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Property tax has been identified as a case of a "good" local tax in the literature. Such argument however presumes that property tax is levied solely on land. In practice, property tax applies to housing and depreciable assets such as machinery and buildings, which implies a feature of capital tax. It is known that capital tax distorts capital investment. The present paper analyzes the effects of property tax on capital investment. To be concrete, we use panel data of manufacture census such as Census of Manufacture and Economic Census for Business Activity, and examine how property tax on depreciable assets in Japan affects capital investments by small and medium enterprises. It is established that property tax negatively affects their investment and such adverse effects are exacerbated among enterprises with liquidity constraints.