Legal System Efficiency and the Role of Tax Law ―Revisiting Kaplow & Shavell's "Double Distortion" Thesis (FUJITANI Takeshi)
Legal Systems Surrounding Income Redistribution: Essays on the Intersection between GAFA Taxation Issues and Talent Taxation Issues (ASATSUMA Akiyuki)
Designing a Tax System that Encourages Innovation by Start-ups (NAGATO Takayuki)
Conflicts between Trade Regulations and Tax Measures (YOSHIMURA Masao)
The Role of Taxation in Economic Stabilization (FUJIOKA Yuji)
Intergenerational Equity and Tax Law: Taxation, Public Finance, and Social Security (KOHYAMA Hiroyuki)
| By FUJITANI Takeshi | (Professor, Institute of Social Science, The University of Tokyo) |
One of the classic achievements in the field of "law and economics" (the economic analysis of law) is Kaplow & Shavell (1994) (hereinafter "KS1994"), which put forth the proposition that, "Under welfarism, a legal system should only pursue efficiency, and the problem of inequality in income distribution should be exclusively addressed via income redistribution through the tax and transfer system. While KS1994 has been widely accepted by law and economics researchers, mainly in the United States, it has been criticized by commentators with a strong interest in the issue of income distribution because KS1994 focuses solely on the perspective of legal efficiency and gives a moral excuse to ignore the issue of income inequality. In Japan, however, such controversies themselves are not widely known.
In order to fill this gap, this paper surveys a myriad of academic literature addressed to KS 1994 and gives an overview of its current state after 30 years of KS 1994’s debut. For that purpose, the scope of review is limited to those belonging to the welfarist approach in a broad sense so as to keep the discussion in a reasonable amount. In particular, the paper clarifies what KS1994 argued and what can (not) be deduced from this influential work.
As a result of this examination, the following points became clear. First, no welfarists completely reject KS1994, and most of the criticisms have been directed at the “overselling” of the KS1994’s general proposition. KS 1994’s solid theoretical model has its limit in scope; despite its “general” appearance, it does not necessarily support all the cases that KS1994’s advocates believe it does. As far as the theoretical model is concerned, KS1994's conclusions are moderate and reasonable. For example, KS1994 neither affirms nor denies that the legal system deals with inequalities other than "income." The equitable consideration (and reconfiguration) of legal entitlements is not necessarily debunked from KS1994's theoretical model; such is simply out of the scope of KS 1994’s theoretical model. In addition, the conditions under which KS1994 holds are limited. For example, when viewed as a means of redistributing income, "tax and transfer" is not always a superior or politically viable method. These points, which became clear through the debate surrounding KS1994, clarify the reservations about its theoretical model. Unfortunately, KS1994 by itself did not adequately describe these limits, which the subsequent literature has elucidated. However, this version – "KS1994 supplemented by these theoretical reservations" would not enjoy the same appealing power as the widely-circulated,
overly-simplified reading of KS 1994.
Keywords: efficiency, income redistribution, welfarism, law and economics, legal system, income tax, double distortion
JEL Classification: H20, K00, K34, D72
| By ASATSUMA Akiyuki | (Professor, College of Law and Politics, Rikkyo University) |
Corporate taxation in international tax law has traditionally been based on the geographical allocation of income based on a "place of production" criteria. The "place of production" criteria here is based on the idea that the operation of tangible factors of production, such as people, machines, and factories, etc., are the source of income in the "from what" sense, and that the location of such factors is the source of income in the "from where" sense. The geographic allocation of income is different from the personal attribution of income that is derived from the arm's length principle in transfer pricing taxation. In the 21st century, however, there is an emerging trend toward a slight modification of the arm's length principle and an emphasis on the operation of tangible factors of production. On the other hand, arguments to incorporate the place-of-demand criterion in the allocation of taxing rights among nations have been discussed in academia since the 1990s and at the level of government representatives since 2018. It can be said that this is a skepticism toward determining taxation relations by focusing on factors of production.
The theory of optimal taxation with respect to individuals differs from international tax law in that it does not include a geographical perspective. However, in contrast to the traditional way of thinking that focuses on factors of production, they have a similarity in that the significance of taking into account ex-post results has come to be discussed. The growing expectations of the place of demand criteria in international tax law and the emphasis on ex-post results in the theory of the optimal taxation of individuals can also be justified from the perspective of dealing with winner-take-all corporate income, such as with GAFA, and with winner-take-all income, such as with the superstar effect for individuals.
Keywords: comprehensive income concept, consumption-type income concept, optimal tax theory, talent taxation, transfer pricing taxation, arm's length principle, place of production criterion, place of demand criterion
JEL Classification: H21, H24, H25, K34
| By NAGATO Takayuki | (Professor, Faculty of Law, Gakushuin University) |
This study examines whether Japan's tax system is efficiently designed to promote innovation by start-ups.
First, we explore the justification for tax incentives to promote innovation. Tax incentives can be justified when one of the following exists: (1) an undersupply of innovation due to its positive externality, (2) restrictions on start-ups' access to financing due to information asymmetry, and (3) structural distortions of the basic tax system due to the progressive tax rate structure, double taxation of corporate profits, and the realization principle of capital gains taxation. Next, we highlight some pressure points to consider when designing tax incentives for innovation by referring to theoretical studies and developments in tax policy and practice in the United States (US).
The challenges of tax policy for innovation in Japan include the following: (1) start-ups seldom benefit from various tax incentives for innovation due to the lack of tax refundability for losses and R&D tax credits, which have the limited carryforward period, and strict legislative and judicial restrictions on the transfer of tax attributes; (2) the historically layered revisions of the system make it too complicated to be used by start-ups, whose time and financial resources are limited; and (3) the policy on entrepreneurs’ entry and exit strategies is inconsistent with the ideal of progressive taxation in the personal income tax system, although Japan’s tax system is designed to encourage entry by allowing the conversion of labor income into capital gains on stocks, thereby easing the success tax on entrepreneurs and mitigating the lock-in effect in the exit phase.
Keywords: tax and risk taking, R&D tax credits, Tax Receivable Agreement (TRA), capital gains taxation, IPO, M&A
JEL Classification: H25, K34, O38
| By YOSHIMURA Masao | (Professor, Graduate School of Law, Hitotsubashi University) |
Recently, some countries have introduced tax measures to influence the policies of other countries or to initiate international tax discussions. As a result, conflicts between new tax laws and trade rules are becoming more common.
Under current trade rules, it can only infringe when it discriminates against certain foreign services or service providers. Therefore, trade law is not considered unduly restrictive. It should be noted, however, that a distinction is made based on the traditional classification of direct and indirect taxes. It is not reasonable to harmonize trade law and tax law by designing rules based on the current distinction of relevant tax, according to the author. The author suggests expanding the multilateral fromework (the BEPS Inclusive Framework) to overcome this problem.
Keywords: international taxation, digital services tax, trade act
JEL Classification: H25, K34
| By FUJIOKA Yuji | (Associate Professor, Graduate School of Law, Hitotsubashi University) |
This Article provides a thorough examination of the role that taxation as a macroeconomic stabilizer should play in the future.
The role of taxation in economic stabilization overlaps with the functions of public finance, and is also related to the concept of income. Although the function of taxation as a stabilizer has been taken into account in past discussions on Japanese tax reform, it has not had a specific influence on Japanese tax policy. Rather, after the drastic tax reforms in late 1980s, more emphasis has been placed on the revenue-raising function of taxation to secure stable financial resources for social security, thereby the role of taxation as a stabilizer is no longer the focus of attention. Although the United States is showing a similar trend, it is noteworthy that, after the Global Financial Crisis, the debate over taxation's function of stabilizer has once again arisen.
Referring to discussions in the United States, this Article analyzes several provisions in the Japanese tax code that stabilizes or destabilizes the economy.
In a broad sense, fiscal and monetary policies, as well as the legal system itself, can be used to respond to economic fluctuations, the remaining task in this Article is to examine the legal and institutional design for economic stabilization, including these issues.
Keywords: law and macroeconomics, business cycle, economic fluctuations, role of taxation, automatic stabilizer
JEL Classification: E32, E63, H23, K34
| By KOHYAMA Hiroyuki | (Professor, Graduate Schools for Law and Politics, The University of Tokyo) |
This paper provides an overview of the state of the debate on the intergenerational equity debate on fiscal issues.This paper will examine the issues from the perspective of what responsibility the current generation bears to future generations. It considers the following perspectives: (1) the perspective of tort law, (2) the perspective of contract law, (3) the perspective of generation chains, (4) the perspective of "better than me," and (5) the perspective of "better than our current median." Then, as each argument, it examines (A) the intergenerational distribution of the tax burden as a fiscal resource for responding to crises, and (B) a definition of “income" as the subject of social insurance premiums, which are at the intersection of tax law and social security law. In determining the level of burden for national health insurance premiums and for the medical care system for the elderly in the latter stage of life, it is necessary to consider both the definition and the capture method from the perspective of intergenerational equity. This is because the definition of income in the national health insurance system is based on the definition "income" for individual residential tax under local tax law, not on the definition of income under national income tax law.
Keywords: tax law, public finance law, social security law, intergenerational equity, fairness
JEL Classification: K10, K34
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