Working Paper

This paper provides the first comprehensive analysis of how firms in emerging economies respond to carbon taxation, leveraging detailed administrative data from South Africa—a potential trailblazer for other developing countries with limited state capacity amid the growing global push for carbon pricing. We examine the dynamic impacts of the carbon tax on firm-level outcomes—such as profits, sales, capital, and labour inputs—across manufacturing and mining firms, which are key sectors in the context of the carbon tax. Contrary to concerns that carbon taxes may hinder economic growth or reduce employment, our findings show no evidence of negative average impacts on firm performance or jobs. However, this overall result masks significant heterogeneity in the tax’s effects across sectors, driven by the sector-specific design elements of the South African carbon tax. Firms expecting higher effective tax rates may have intensified their use of emission-intensive machinery and depreciated capital in anticipation of the tax. This behaviour appears to stem from firms resolving regulatory uncertainty or seeking to recover costs from stranded assets.

R&D tax subsidies are prevalent policy tools to internalise knowledge externalities

from private sector R&D. In this paper, we use rich firm-level data to empirically

document that a significant part of the knowledge externalities induced by R&D tax

subsidies accrue outside of the policy-setting country. R&D tax incentives prompt

significant cross-border knowledge flows, measured by patent-forward citations, and

are shown to increase the real economic activity of foreign knowledge-receiving firms.

Our findings imply that current, decentrally set R&D tax subsidies are inefficiently

small from a global perspective - most likely by a significant margin.

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 product 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 corporate 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.