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June 14, 2012
News Analysis: The Pitfalls of Comparative Tax Analysis
Joseph J. Thorndike

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Comparative analysis is always tempting. Confronted with two apparently similar but clearly distinct phenomena, the natural impulse is to sort out the commonalities and differences.

That is all well and good, as far as it goes. But problems arise when you try to distill conclusions -- or worse yet, policy recommendations -- from the comparison. In the quest for practical guidance, it's tempting to paper over differences and emphasize shared attributes.

I was reminded of that danger recently while working on a comparative study of U.S. and Japanese corporate taxation. In conjunction with my coauthor, Satoshi Sekiguchi of Rikkyo University, I've been trying to answer what seems an obvious question: Why are the United States and Japan outliers when it comes to statutory tax rates on corporate income?

Not So Obvious

The question is not so obvious, and perhaps not even apt. As a critic of my paper noted during a presentation at the Law and Society Association in Hawaii, Japan and the United States may both impose relatively high statutory rates on corporate income, but historically, effective rates are substantially higher in Japan. Given that difference, is it really useful to lump the countries together as outliers? More broadly, is a comparative analysis likely to be helpful?

The difference in U.S. and Japanese effective tax rates on corporate income had not escaped my or my coauthor's attention. Indeed, Sekiguchi regards that difference -- and the compromised U.S. corporate tax base that gives rise to it -- as the most important point of contrast between the two nations. But is that distinction so great as to vitiate the comparative project entirely?

No. There is an obvious and compelling political reason for making the comparison: It gets made all the time. In April, when Japan lowered its corporate tax rate from 40.7 percent to 38 percent and the United States inherited the dubious distinction of having the developed world's highest statutory rate of 39.6 percent, the comparison was evident almost everywhere. "The U.S. was at least able to stay out of the top spot until now because Japan had also failed to get its corporate tax rate in line with other more competitive nations," wrote Curtis Dubay of the Heritage Foundation. "But Japan has finally seen the light and reduced its rate as of April 1."1

Such comments imply a cross-national policy imperative: Get with the program! If countries around the world are engaged in a "global tax race," as the Tax Foundation's Scott Hodge has argued, then the United States can ill afford to fall any further behind.2

Conceivably, a comparative analysis of the United States and Japan might support that imperative. After all, if we can only figure out how Japan managed to cut its rate, then perhaps we can develop a similar reform for the United States. If they can see the light, then maybe we can, too.

In fact, Japan's experience with corporate tax reform may not hold obvious lessons for U.S. policymakers. As comparative analysis makes clear, the political economy of Japan's corporate tax is different from that of the United States. Several points of distinction seem especially salient:

  • Japan relies more heavily on corporate tax revenue than the United States;
  • Japan's VAT creates more fiscal maneuvering room for corporate reform; and
  • Japan's relatively more intact tax base makes statutory rate reduction even more important to Japanese corporations than it is to U.S. companies. (And it potentially makes the Japanese business community more of a coherent voice in policy discussions, compared with the fragmented pseudo-community in the United States.)

Ultimately, such differences raise doubts about what lessons American policymakers might learn from their Japanese counterparts. Facing different economic conditions and divergent political constraints, the two nations may not have much to teach one another.

Historical Comparisons

Historical analysis further complicates any effort to distill policy lessons from Japanese tax reform. Among historians, comparative history is popular but complex. By nature and training, historians are particularists, fascinated with documentary evidence that leads in the direction of smaller, more localized stories, not broad, cross-national ones. For decades, that inclination led to the proliferation of tedious, narrow monographs. More recently, there's been a revival among fans of generalization, thanks in part to the influence of related disciplines, like sociology and political science.

But almost by definition, history makes generalization difficult. And it is particularly difficult to generalize in the area of U.S.-Japanese corporate tax policy.

The United States and Japan arrived at their apparently similar corporate tax rates by different routes. The two countries have differed, for instance, in patterns of intercorporate shareholding (more popular in Japan), dividend payment (more generous in the United States), and labor organization (more complete in Japan). Japan's fiscal history has been more troubled in recent decades, with severe fiscal crises long predating the current U.S. problems.

The differing circumstances managed to lead both countries to high statutory tax rates on corporate income. But in terms of both genesis and survival, those rates are more distinct than similar. By implication, any retreat from them is also likely to be distinct.

Ultimately, the greatest contribution of comparative analysis to tax policymaking may be negative: It serves to debunk easy but inaccurate generalizations about global trends or policy imperatives. Political and policy reform tends to develop a sort of teleological momentum -- change starts to seem not just imperative, but inevitable.

In the case of the corporate income tax, lower rates can seem a near certainty. And maybe they are. But that "certainty" will be derived from the particular institutions and historical experiences of individual nations. Countries may all end up in the same place -- due in part, no doubt, to cross-national pressures like globalization. But how they get to that policy destination will necessarily be sui generis.



2 See Doc 2012-6990 or 2012 TNT 64-29 .