Title: What happens when you tax the rich? – Evidence from South Africa

Abstract - 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. Our preferred estimates suggest an elasticity of taxable income (ETI) of 1.1. Consistent with few deductions in the South African PIT system, adjustments are driven by changes in broad income – in particular investment income and other income components that are not subject to third-party reporting. While standard labor income remains unaffected, our evidence does point to real effects of the reform: Treated taxpayers attract fewer annual incentive and bonus payments after the reform. Consistent with this reflecting less effort provision by leading workers in South African firms, we find that businesses, which employ workers subject to the tax increase, experience a significant decline in business output after the reform.

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