Working Paper & Work in Progress

A broad empirical literature examines the impact of corporate taxes on firms’

investment, location, and tax avoidance behaviour. Other corporate adjustment

margins have received relatively little attention. In this paper, we use administrative

customs and tax return data from South Africa to demonstrate that corporate taxes

influence firms’ export performance and their competitiveness in international prod-

uct markets. Leveraging a difference-in-differences approach, we find that exports

by South African firms decline significantly when foreign competitors—serving the

same destination market in the same 6-digit product category—experience a corpo-

rate tax rate cut. In further analyses, we document that reductions in competitors’

tax costs are associated with a decline in real activity of South African exporters.

Rising levels of income inequality and tight government budgets have spurred discussions in many developing nations about how to appropriately tax high-income earners. In this paper, we study taxpayer responses to an increase in the top marginal tax rate in South Africa drawing on exceptionally rich tax administrative data and a transparent empirical identification design. We establish that treated taxpayers strongly reduce their reported taxable income in response to the tax reform. Taxpayers’ responses are driven by both reductions in broad income and increases in tax deductions. While regular labour earnings remain unaffected, we find a marked drop in non-monetary wage components and annual incentive and bonus payments. Linking individual to corporate tax returns, we show that part of the observed response reflects adjustments in real economic activity: South African firms, which employ treated workers, experience a decline in output after the reform. 

In recent years, a growing number of countries have enacted tax rules that require multinational enterprises (MNEs) to document their intra-firm trade prices and show that they are set as in third-party trade. The objective of these rules is to limit opportunities for strategic trade mis-pricing and profit shifting to lower-tax affiliates. In this paper, we study the regulations’ fiscal and real effects. Testing ground is the introduction of transfer price (TP) documentation rules in France in 2010. Drawing on rich firm-level data, we show that affected MNEs reduced their outward profit shifting from France, while simultaneously lowering real investments in the country. Outside of France, treated MNEs decreased their investments at low-tax (but not at high-tax) group locations. We show that the observed investment response in France and abroad is driven by reform-induced increases in firms’ effective tax costs; there is no indication that MNEs responded to compliance burdens associated with the new TP documentation rules.

Taxpayer audits are key instruments to combat tax evasion. Whether they deter tax non-compliance beyond audited taxpayers is largely unclear, however. Drawing on rich tax administrative data for South Africa, we show that business tax audits enhance the tax reporting compliance of unaudited firms in the same local network as the targeted business. On average, firms’ reported tax liability increases by around 1.5% when a business in close proximity (located within a 100m radius) undergoes an audit. This estimate translates into sizable aggregate revenue gains, as audited firms are linked to numerous neighbors. Additional analyses show that audit spillovers emerge across a larger spatial scale within industry and tax preparer networks. Our findings carry important implications for the design of tax enforcement policies.