Do firms have a preference for paying exactly zero tax?

Understanding firms’ responses to corporate tax rates is crucial for optimal tax design; particularly so for developing countries, which rely more heavily on corporate income taxes. We study administrative data on the taxable income of distribution small businesses in South Africa, around three prominent “kink points” with discontinuous marginal tax rate changes. There is substantial and persistent bunching at the two higher income kink points, with associated implied elasticities between 0.2 and 0.3. Bunching at the lowest kink (where marginal tax rates change from 0% to 7%) appears qualitatively different, with firms seemingly treating moving across this kink as leading to a substantial discrete shift in the level of taxes due (i.e., treating this kink as a “notch”). This is consistent with a preference to avoid paying a positive tax bill. We provide evidence against several natural explanations for this behaviour, including hassle factors or misperceptions of the tax schedule. Allan is a lecturer and PhD student at the School of Economics at the University of Cape Town. His research focusses primarily on household and consumer finance, and public economics.