Journal Article
How do small firms respond to tax schedule discontinuities?

Evidence from South African tax registers

This article is currently available for early online view.

We study the responsiveness of small- and medium-sized firms to a small-business corporate income tax schedule using population-wide administrative data from South Africa. We find sizeable 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 sizeable part of the response is driven by reporting responses rather than real economic behavior. We find indicative evidence that reporting behavior is linked to underreporting of sales and legal tax-planning activities.

Journal Article This peer-reviewed research is available free of charge. UNU-WIDER believes that research is a global public good and supports Open Access.