Taxation and the behavior of corporate groups

This dissertation is motivated by an observation that in practice, it is surprisingly difficult to define a "firm." Because a decision maker may control multiple entities that are legally independent, tax systems can induce interesting behavioral responses involving a group of corporations that are affiliated through ownership. However, little is known about the extent to which taxes affect the behavior, due to the considerable data requirements. The aim of this dissertation is to contribute to the understanding of the effects of taxes on the behavior of corporate groups. To this end, three essays examine the effects of the value-added tax (VAT) and corporate income tax in the context of Japan, utilizing a unique data set on affiliated corporations.;The first chapter shows the sensitivity of organizational structure to tax institutions surrounding firms. It exploits the VAT threshold in Japan as a "natural experiment" to assess the impact of the exemption from the VAT for firms with sales below a particular threshold on where legal boundaries are drawn within a firm. I find that there was a surge of spin-offs following the VAT introduction, whereby firms divided into multiple subsidiaries to gain preferential tax status. The result, which indicates the sensitivity of legal boundaries to institutions; suggests that large firms are very responsive to public policies that favor small firms over large.;The second chapter focuses on the economy-wide implication of the behavioral response identified in the first chapter. I examine the effects of the VAT threshold on the size distribution of corporations by applying a semi-parametric technique developed by Dinardo, Fortin and Lemieux (1996) that allows one to control for changes in underlying corporate attributes across time. The results suggest that the tax discontinuity caused the movement of mass in the size distribution toward corporate sizes favored by the tax system.;The third chapter examines the problem arising from the asymmetric treatment of positive and negative income under a corporate income tax that lacks allowance for group taxation. This chapter finds that firms shift income among domestic corporations to reduce their group tax liability.