“Sakura” has not grown in a day: infrastructure investment and economic growth in Japan under different tax regimes

Abstract

This paper explores whether the validity of infrastructure investment serves as a procyclical or anticyclical instrument to counter a recession in the case of the Japanese economy. Infrastructure consumption is usually financed by taxes. For that reason, this paper accounts for the presence of alternative tax regimes. Namely, we have chosen regimes under Total Taxation, Capital Taxation, Corporate (Income) Taxation, Household Income Taxation and Indirect Taxation (valued added tax) to identify different policy outcomes under different regimes. The results indicate that when infrastructure is financed by different taxation across all its variations there is a negative relationship with GDP which is robust when the same estimation procedure is explored for industrial production. The trade-offs of a negative relationship, however, come with a lesser duration of the industrial production recession. The empirical results indicate that trying to get out of recession with infrastructure investment is underutilization of resources and does not touch the real issues that caused the recession. KeywordsEconomic growth • Infrastructure policy • Tax regimes • Japan • Markov switch dynamic regression JEL Classification H54 • E62 • O47 B Nicholas Apergis

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