Abstract
Using data contained in South Africa's national accounts and revenue statistics, this paper constructs time-series of effective tax rates for consumption, capital income, and labour income. The macroeconomic approach allows for a detailed breakdown of tax revenue accruing to general government and the corresponding aggregate tax bases. The methodology used also yields effective rate estimates that can be considered as being consistent with tax distortions faced by a representative economic agent within a general equilibrium framework. Correlation analysis reveals that savings (as a percentage of GDP) is negatively correlated with both capital income and labour income tax rates. Investment (as a percentage of GDP) is positively correlated with the capital income tax rate, an outcome suggestive of the direct relationship between volatile capital inflows into South Africa and capital tax revenue
Highlights
Most analyses of tax policies has been geared towards the formulation of a tax system capable of providing, in the most efficient and equitable way possible, adequate revenue to finance the required level of government expenditure
The construction of reliable tax rate estimates are necessary for macroeconomic modelling, especially in the assessment of implications of significant fiscal policy changes such as tax harmonisation in economic blocs, fiscal deficit reduction and allocation of government expenditures aimed at providing socio-economic reforms (Mendoza et al, 1994)
South Africa's emerging market status has led to significant increases in the volatility of capital inflows and, in turn, caused fluctuations in the revenue generated from taxes imposed on capital income
Summary
Most analyses of tax policies has been geared towards the formulation of a tax system capable of providing, in the most efficient and equitable way possible, adequate revenue to finance the required level of government expenditure. The construction of reliable tax rate estimates are necessary for macroeconomic modelling, especially in the assessment of implications of significant fiscal policy changes such as tax harmonisation in economic blocs, fiscal deficit reduction and allocation of government expenditures aimed at providing socio-economic reforms (Mendoza et al, 1994). Most previous studies on the construction of effective tax rates and the extension of the rates in analysing implications of tax policy on growth and business cycles have been conducted for developed countries or a mix of developing countries (see for example, Greenwood and Huffman, 1991; Easterly & Rebelo, 1993 and Mendoza et al, 1994). An effective tax system would aid the government's objectives of allocating investment funds towards improving levels of physical and human capital, and addressing the backlogs in delivery of socio-economic infrastructure, especially among previously disadvantaged groups
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