Economic Analysis Series No.182
THE ECONOMIC ANALYSIS

July, 2009
"The effect of parent companies' dividend policy on profit remittance of their foreign subsidiaries"
Eiji Tajika
Masaki Hotei
"The Household Consumption Tax Burden in Japan"
Hiroyuki Yashio
Yuichi Hasegawa
"Estimations of educational production functions: A case of six-year secondary schools in Japan"
Takashi Ohshio
Shinpei Sano
Kaori Suetomi
"Financing Behavior of Japanese Firms"
Koji Sakai
"Impact Analysis of Entry Barriers upon the Coastal Freight Service"
Nobuhiro Hosoe
"Measurements of Effective Tax Rates on Interest Income, Dividends and Capital Gains Income from Stock"
Shizuka Sekita
"Surveys on Work-life balance and productivity"
Ryo Yamada
Miyuki Yoshida

The full text is written in Japanese.

(Abstract)

"The effect of parent companies' dividend policy on profit remittance of their foreign subsidiaries"

When income of firms is taxed on a world-wide basis and the home country's corporate income tax rate is very high, like in Japan whose tax rate is now the highest of the OECD countries, profit remittance from foreign subsidiaries faces a serious tax disadvantage and their income is better left at host countries of lower taxes. However, the fact does not support this for most of Japanese multinationals; their foreign ventures continue to send back part of their income to their parent companies in Japan. This paper tackles this "dividend puzzle" and seeks to solve it by linking parent companies' dividend policy with the profit remittance from abroad. The contributions of the study are first to use a firm-level micro data and second to combine the financial information of parents companies in Japan with that of their foreign subsidiaries to test whether foreign profit remittance has contributed to a stable dividend payment of parent companies. The answer is in the affirmative and the results that we report in the paper are as follows: profit remittance from abroad plays an important role to a stable dividend payment of parent companies; the cash demand of parent companies for paying their dividend affects remittance from abroad, and this applies in a more strict way for the foreign subsidiaries perfectly owned by Japanese parent firms.

"The Household Consumption Tax Burden in Japan"

In Japan, many previous studies have analyzed the household consumption tax burden. Most of these focused on whether or not a reduced tax rate for food and necessities should be used to alleviate the regressivity of the tax. However, from the perspective of economic theory, this direction of research is misleading, as Crawford et al. (2008) discuss in Mirrlees Review, a recent report on comprehensive tax reform in the United Kingdom. According to that theory, there are two problems with previous research in Japan: First, the theory says the burden of the consumption tax is not regressive but proportional. Second, direct income redistribution, such as allowances and refundable tax credits, is more effective than reduced tax rates for helping needy families.
    Based on the argument above, we reanalyzed the household consumption tax burden in Japan. We modified the micro simulation analysis used by Tajika and Yashio (2007) to investigate not only the household burdens for income tax and social security contributions but also the consumption tax burden. Finally, in this study we discuss the effects of various tax reforms on household burden, including a consumption tax hike, the introduction of reduced tax rates for food, and a combination of a consumption tax hike and the introduction of refundable tax credits for income tax.

"Estimations of educational production functions: A case of six-year secondary schools in Japan"

This paper attempts to estimate educational production function and examine how school inputs affect educational attainment at the secondary education level in Japan, focusing on six-year secondary schools in Tokyo and Osaka metropolitan areas. We confirm the following three facts.
    First, students' prior attainment, which is gauged by the standardized test score (hensachi), is the key determinant of school performance in the admissions of graduates to universities in both two metropolitan areas.
    Second, after controlling for students' prior attainment and various school characteristics, total class hours are the only school factor that significantly and uniformly affects school performance.
    Third, comparing regression results among three school groups of different average abilities of students reveals that the size and the significance of the impacts of school inputs vary substantially across school groups.
    Our analysis is limited to six-year secondary schools, but the variables of school quality and characteristics are commonly observed from other types of school as well. Hence, our estimation results are at least to some extent relevant when discussing education of high and junior-high schools as a whole. Most of all, our estimation results suggest that we should not be too optimistic about the result of any effort to enforce educational attainment and also that we need more qualified data to precisely assess the efficacy of education policy.

"Financing Behavior of Japanese Firms"

This paper tests the trade-off theory against the pecking-order theory of corporate financing behavior on a panel data set of publicly traded Japanese firms for 1964 to 2005. Comparing the explanatory powers for both the trade-off and the pecking-order models, we find the following. First, for the financing behavior of Japanese firms, the pecking-order model has much greater explanatory power than the trade-off model, while both models are still statistically significant. Second, running the quantile regressions, which allow for the non-normal conditional distribution of the dependent variable, the behavior of most Japanese firms is strongly consistent with the pecking-order prediction. In this sense, the financing behavior of most Japanese firms obeys the pecking-order theory, and this tendency holds for most of entire period after 1964. In the pecking-order theory, there exists no well-defined optimal capital structure, and the meanings of the interest tax shields or the costs of financial distress are assumed to be second-order. This means that the financing behavior of Japanese firms is driven mainly by the need for external funds, not by the adjustment to an optimal capital structure.

"Impact Analysis of Entry Barriers upon the Coastal Freight Service"

The coastal freight service sector in Japan had been protected by voluntary capacity regulation since the end of the World War II. Under the old capacity regulation scheme, permission to install new freighters was only granted when older freighters of equivalent (or greater) capacity were replaced. However, in 1998, that regulatory scheme was reformed into a new and less restrictive one called the "transitional business scheme (zantei sochi jigyo)". The new scheme still carries a high entry barrier, which imposes entry charges of nearly 40% of installation costs upon new freight ships.
    In this study, we developed a partial equilibrium model, econometrically estimated using monthly data from 1998-2005, to quantify the impacts of the entry barrier on this market and welfare. By simulating a hypothetical reduction of the entry barrier by 1%, we found that it would lower service charges by 1.2%, increase traffic by 1.9% and improve social welfare by about 90 million yen. From the perspective of global warming prevention, we cannot support existing regulations either. That is, with a hypothetical 10% reduction of the entry barrier, we could achieve a large increase in coastal freight traffic, which would result in comparable target traffic levels considered in the modal-shift program. This would be a double-dividend of the regulatory reform.

"Measurements of Effective Tax Rates on Interest Income, Dividends and Capital Gains Income from Stock"

This paper measures the effective tax rates of three types of capital income (interest income, dividends and capital gains income from stock) and two types of financial assets (deposit and stock) and discuss which type of capital income and financial asset is tax-favored. I found that the effective tax rate on dividends is always higher than that on interest income during 1973-2003. I also found that if rate of capital gains is low and holding period of stock is short, the effective tax rate on capital gains from stock is higher than that on dividends, but if rate of capital gains is higher than 5 percent and holding period is longer than 5 years, the effective tax rate on capital gains from stock is the lowest among three types of capital income, regardless of inflation rate and year. In addition, if rate of capital gain is 1 percent (18 percent), the effective tax rate on stock is higher (lower) than that on deposit, and if rate of capital gain is 5 percent, the effective tax rates on stock and deposit are relatively similar. Conducting the simulation, I found that under 2011 tax rule, if rate of capital gains is high and holding period of stock is long, the effective tax rates on capital gains from stock is dramatically low, comparing to the effective tax rates on interest income and dividends. Moreover, the effective tax rate on stock is lower than that on deposit in most cases.

"Surveys on Work-life balance and productivity"

In recent years, developed countries are increasing their focus on policies that improve the balance between work and life. Japan established a "work-life balance" charter at the end of 2007; the Japanese government, workers, and employers have agreed to collaborate in the belief that creating a society that balances work and life for all generations is desirable.
    Behind the trend is the fact that long working hours are a big reason for Japan's falling birthrate, which has threatened the sustainability of economic society.
    The government will actively pursue a better work-life balance while avoiding any interruption in the growth of companies.
    This paper investigates how the policy of improving Japan's work-life balance will affect the productivity of companies.

First, we found that companies that implement policies toward improving the work-life balance tend to have better productivity and better employee retention rates (especially for women who have given birth), and tend to foster highly motivated individuals.
    Second, boosting productivity means that executive orders must be carried out to review the split of work and the way of work flexibly with improving the balance between work and life.

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