Local economic effects of the fiscal decentralization reform: Evidence from enhanced local tax autonomy

• In Event: Decentralization and Administrative Unit Fragmentation

Abstract

This study analyzes the local economic consequences of enhanced tax autonomy in Japan, focusing on the effects of excess corporate inhabitant tax rates on business establishments. Employing staggered difference-in-differences and event study approaches, we examine how this partial fiscal decentralization reform impacts the tax base. Our research addresses gaps in the fiscal decentralization literature, which has primarily focused on expenditure or administrative hierarchy reforms. We investigate the economic outcomes of enhanced local tax autonomy, a key aspect often overlooked, particularly in centralized countries. By analyzing the influence of excess tax rates, we provide insights into the effects of enhanced tax autonomy on local economies. Our identification strategy addresses endogeneity concerns prevalent in previous studies. The findings reveal that enhanced tax autonomy, through excess corporate tax rates, negatively affects business establishments. We also find heterogeneity in these effects across establishment size, organizational structure, and industry. Furthermore, we explore horizontal and vertical fiscal externalities, and analyze the economic effect on land prices.

Authors

• Haruaki Hirota, Musashi University

• Hitoshi Saito, Wakayama University

• Hideo Yunoue