On the Welfare Implications of Taxing Corporate Income

Developing countries typically raise a much larger fraction of their tax revenues from the corporate income tax versus a personal income tax, likely due to the difficulty of collecting individual taxes in contexts with low state capacity. Given the recent worldwide interest in inequality, a large research program has developed to understand the redistributive consequences of taxing personal incomes, but there is little corresponding work to clarifying the redistributional consequences of taxing corporate income.

This paper presents an economic framework for understanding the redistributional consequences of taxing corporate income. We then combine the framework with micro-administrative data from South Africa, a high inequality country where corporate taxes make up a large fraction of tax revenues, to illustrate how incorporating redistributional motives changes tax policy.