—This paper investigates how firm values change when consumption tax rates increase and corporate tax rates decrease. The computation is based on the residual income valuation model starting from the discounted free cash flow model in which we construct a pro forma financial statements using Arzac’s framework. We compute equity values at the individual firm level assuming March 31, 2012 as an evaluation date. We find that an increase in consumption tax rate decreases equity values for a majority of firms, but not necessarily all firms. A corporate tax rate cut helps increase the equity value for a majority of firms. The trade-off relationship of a consumption tax rate hike and a corporate tax rate reduction is subtle, but the suitable mix helps increase equity value of firms overall.
—Value added tax, corporate tax rate, residual income model.
Keiichi Kubota is with the Graduate School of Strategic Management, Chuo University, 1-3-27 Kasuga, Bunkyo-ku, Tokyo 112-8511, Japan (e-mail: firstname.lastname@example.org).
Hitoshi Takehara is with the Graduate School of Finance, Accounting and Law, Waseda University, 1-4-1 Nihombashi, Chuo-ku, Tokyo 103-0027, Japan (e-mail: email@example.com).
Cite: Keiichi Kubota and Hitoshi Takehara, "Effects of a Consumption Tax Rate Increase on Equity Value: Japanese Firms Experience," International Journal of Trade, Economics and Finance vol.6, no.2, pp. 125-128, 2015.