Taxing Top Incomes in the Emerging World - Economic Impact under the Microscope

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.

Axelson, Christopher, Antonia Hohmann, Jukka Pirttilä, Roxanne Raabe and Nadine Riedel (2024), Taxing Top Incomes in the Emerging World - Economic Impact under the Microscope, WIDER Working Paper, Helsinki