How Do Small Firms Respond to Tax Schedule Discontinuities? Evidence from South African Tax Registers
VATT Institute for Economic Research Working Papers 85
37 Pages Posted: 29 Apr 2017
Date Written: April 28, 2017
We study the responsiveness of small and medium-sized firms to corporate income taxes using population-wide administrative data from South Africa. We find sizable bunching of firms at the corporate income thresholds where the corporate tax rate increases, implying active responses to corporate income taxes. The observed bunching is very sharp, and reacts immediately to changes in the location of the kink points. These observations suggest that a sizable part of the response is driven by reporting responses rather than real economic behavior. We find indicative evidence that reporting behavior is linked with underreporting of sales and legal tax planning activities.
Keywords: corporate taxation, small firms, emerging economies, bunching
JEL Classification: H21, H25, H32, O12
Suggested Citation: Suggested Citation