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2002 at 25.38%. However, in the bottom row of the table, the smallest number is 9.28%
in 2008 and 11.43% in 2007. In fact, in the past four years, lower percentage numbers
for this highest value-ratio group with a VR value above 1.20 are consecutively
reported. Accordingly, the result reveals that during the past four years, remarkable firm
value appreciations were not expected by the corporate tax cut. The frequency for VR
values between 1.10 and 1.15 dramatically decreased in 2009 at 46.35%. There are not
conspicuous changes for VR values between 1.05 and 1.10 and 1.15 and 1.20 in the past
four years. Hence, the result again suggests, unlike previous years, that 2008 and 2009
may not have been the best time to conduct government tax rate cuts, although a
majority of firms could still incur value appreciation due to the cuts.
From the table, the best timing that the corporate tax rate cut should have been
enacted was in 2007 when 81.15% (=53.64+16.08+11.43) of the firms belonged to
VR values higher than 1.10. The reason for this might be due to the persistent
downturn of the Japanese economy during our observation period because future
profits were expected to decline, and thus corporate tax reduction effects became
smaller. In other words, the decrease in effective tax rates for particular firms might
have been smaller than the decrease in statutory tax rates which canceled out (added
to) any gain (loss) from deferred tax liabilities (assets).
Noteworthy is the fact that the value decrease among a larger number of firms is
observed in 2002 and 2000. For the range of VR within 0.85 and 1.00, 8.2%
(=2.33+2.63+3.24) of the sample firms are in this category in 2000 and the
corresponding number is 9.08% (=2.69+3.03+3.36) for 2002. Future profits were
expected to keep declining (because of the state of the Japanese economy) and corporate
tax reduction effects became smaller for non-profitable firms with tax loss carry-
forward than those for profitable firms who continued paying taxes at the highest
marginal tax rate bracket of 40.87 %. In other words, the decrease in effective tax rates
for particular firms might have been smaller than the decrease in statutory tax rates
per
se,
and canceled (added to) any gain (loss) from deferred tax liabilities (assets).
In Kubota and Takehara (2012), where they do not consider the secondary
investment effect of the corporate tax rate as considered in the current paper,
comparable numbers for appreciation case is smaller and the ones for depreciation case
is larger. When investment effects are not considered, losing firms cannot enjoy tax loss
carry-forward allowances by further increasing investment expenses, and in this case,
retained earnings and consequent investment will not increase. For profitable firms, the
converse holds and by increasing investment and profits the firms can increase
accumulate retained earnings for future investment expansions. For the regulators,
special funding with a lower cost for this group of firms and/ or other tax subsidiary
instruments as additional measures might have had to be augmented from a social
welfare viewpoint to neutralize these positive and negative effects of the tax rate cut.
18
Table 2 reports an industry-wide distribution of VR ratios as of June 2009.
Industry classification is based on 33 classifications of the Tokyo Stock Exchange.
18
Samuelson (1964) argues against accelerated depreciation in the sense of subsidizing large
firms at the expense of small firms. Here, the augment goes in a similar fashion where the
tax rate cut subsidizes profitable firms, but works against losing and small firms (see Table
5). If losing firms are inefficient ones, it is a natural consequence to exit the market, but for
small firms, the implications are not easy to assess. However, this is outside the scope of the
current paper.
