Determinants of Taxation Capacity and Effort: A Case Study of South Africa

Abstract

It is argued and debated across literature that effective tax system is without doubt one of the major factors that influences the economic growth and development of a country. Effective tax system is important to the economy as higher tax revenues reduce the aid-dependency of low economically developed countries. Tax systems also have a hand in influencing international investment decisions. It is also a common belief that effective tax system encourages good governance and improves state accountability. Effective tax system is integral for both the developing and developed countries, however, this study will focus on the analysis of a developing country as they are the victims of and are highly vulnerable to high budget deficits. The study uses annual data covering period 1994-2015. The study tested for the unit root using the Augmented Dickey Fuller (ADF) and the results were stationary after first difference. VAR Granger Causality was employed to assess the causality between the variables. Diagnostic tests confirmed the absence of heteroscedasticity, serial correlation in our model and the model was correctly specified and normally distributed as confirmed by the Jarque-Bera test.