Corporate taxation and firm-level investment in South Africa

This paper investigates the responsiveness of firm-level investment to corporate tax changes in South Africa over the period 1999 to 2012. The study exploits rare changes in corporate tax policy to assess the responsiveness of firm-level investment among Johannesburg Stock Exchange listed non-financial firms. Our estimation of a neoclassical investment model using GMM techniques shows that although changes in corporate tax policy reduced the tax-adjusted marginal cost of capital over time, the reductions did not translate into significant investments in fixed assets. We speculate that the well-documented financial frictions in the capital markets could explain the failure of neoclassical investment theory in South Africa. Our findings are similar to those in other developing countries and crucially suggest that investment policies should look beyond the use of corporate tax incentives. Mashekwa Maboshe is a PhD finalist in the School of Economics at university of Cape Town (UCT) and a graduate associate at SALDRU, UCT. He holds a Masters and Bachelors degree from UCT and the University of Zambia respectively. He is currently a researcher with the University of Lusaka, a visiting research fellow in public economics at the Zambia Institute of Policy Analysis and Research (ZIPAR), and a non-resident research associate at the CEQ Institute at Tulane University (USA).