Intergovernmental Grant and Tax Collecting Efforts in Japan: Estimating the Effect of Local Allocation Tax Grants on Local Tax Collection Rates

Abstract

As part of the Trinity Reform, the Japanese Ministry of Internal Affairs and Communications (MIC) established the Administrative Reform Incentive Assessment (ARIA) program under the local allocation tax (LAT) system during the fiscal year 2005. This program was aimed at motivating local governments with LAT grants to raise their tax collection rates (TCRs) since a number of economists had asserted that LAT grants were eroding the fiscal discipline of local governments. Our paper uses empirical methods to estimate the average treatment effect (ATE) of the program and finds that it does not provide such an incentive and that the TCRs of local governments are unchanged by the Trinity Reform, irrespective of whether these governments receive LAT grants. We also conclude that the TCRs do not support the argument that LAT grants diminish the tax collection incentives of local governments.