Differential corporate taxation and inter-asset investment distortions in South Africa

18 June 2021
Publication Type: Working Paper
Economic Theme: Public Finance
JEL Code: D22, F14, L25, O12, O32, O55

South Africa has since the 1990’s actively reformed its corporate tax policy to stimulate investment in various assets and industries. While the investment impact of corporate taxation has been evaluated in various studies, no effort has been made to assess the potential inter-asset distortions due to differential taxation. Using a unique asset-industry level dataset, we find evidence of inter-asset distortions arising from differential taxation of assets and industries in South Africa. In particular, compared to a counterfactual benchmark where tax rates are equalized, we find that differential taxation induces under-investment in non-residential structures and computer equipment and over-investment in machinery and transportation equipment. The immediate policy implications are that ignoring distortions due to heterogeneous tax treatment could understate the efficiency and redistributive effects of tax policy in South Africa.

Working paper 865
1 July 2021