Impact of Corporate Tax Reform on Firm Dynamics: An empirical study of the shift from income-based to pro forma standard taxation in Japan

Many countries have reduced their statutory tax rates (STRs) on corporate income while broadening their tax bases. Japan presents an intriguing case study in this context. It has reduced its STR while expanding its pro forma standard tax primarily based on companies' value-added.
This study analyzes the impact of Japan's corporate tax reforms since the mid-2010s on firm dynamics using forward-looking effective tax rates (ETRs) that incorporate pro forma standard taxation. Our observations indicate that these corporate tax reforms lowered the ETR and narrowed the disparities between companies. Although the reduction in ETRs stimulated increased investment and employment, the positive impacts were partially offset for large firms owing to the expansion of pro forma standard taxation, which effectively increased the labor costs.