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How do small firms respond to tax schedule discontinuities? Evidence from South African tax registers

Authors: Wian Boonzaaier, Jarkko Harju, Tuomas Matikka, Jukka Pirttilä

Publication: VATT Working Papers 85

Date: 28.4.2017

Summary

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.

Main research themes: Social security, taxation and inequality

ISBN: 978-952-274-191-2 (PDF)

JEL: H21 H25 H32 O12