Working Paper: NBER ID: w1753
Authors: Fumio Hayashi
Abstract: This paper examines the impact of taxes on the incentive to invest for the Japanese manufacturing sector in the postwar period. The idyosyricratic feature of the Japanese corporation tax system as compared to the U.S. is the prevelence of tax-free reserves and the tax deductibility of a part of taxes paid by corporations in the previous year. Our formula for the tax-adjusted Q and the cost of capital incorporates this. The main conclusions areas follows. While the postulated negative relation with the cost of capital cannot be found, investment in Japanese manufacturing shows until 1974 a strong association with the tax-adjusted Q. Since the change in stock prices, not taxes, is the primary source of changes in Q, the profitability of capitalis the major determinant of investment.
Keywords: taxes; corporate investment; Japanese manufacturing; cost of capital; tax-adjusted q
JEL Codes: H25; E22; L60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Japanese corporation tax system (H20) | investment incentives (O31) |
| tax-adjusted q (C22) | investment levels (F21) |
| stock prices (G12) | tax-adjusted q (C22) |
| profitability of capital (G31) | investment decisions (G11) |
| cost of capital (G31) | investment (G31) |