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Nonlinear Tax Elasticities And Their Implications For The Structural Budget Balance


Author Info

  • Charl Jooste

    (Department of Economics, University of Pretoria)

  • Ruthira Naraidoo

    (Department of Economics, University of Pretoria)


Research on tax elasticities in South Africa mainly employs linear models and shows that taxes evolve symmetrically irrespective of the economic cycle. This study extends this research to show that taxes behave asymmetrically and nonlinearly during expansions and contractions. Estimated linear elasticities imply that a one percent expansion in the cycle increases personal income tax, corporate income tax and value added tax by 1.43, 2.52 and 0.99 percent, respectively. However, estimated nonlinear elasticities are significantly different. During an expansion, the above elasticities increase by 1.89, 2.76 and 2.17 percent, respectively while during a contraction phase these elasticities increase by 0.89, 0.88 and 0.82 respectively. This finding of low tax collection during economic contractions has important implications for fiscal sustainability and overall fiscal prudence in South Africa. The findings of high tax elasticities during expansions might explain the underestimation of revenue by the government.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201022.

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Length: 24 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:pre:wpaper:201022

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Related research

Keywords: structural budget balance; tax elasticities; nonlinearity; Smooth Transition Regression; Autoregressive Distributed Lag;

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Cited by:
  1. Burcu Aydin, 2010. "Performance of Fiscal Accounts in South Africa in a Cross-Country Setting," IMF Working Papers, International Monetary Fund 10/217, International Monetary Fund.
  2. Burcu Aydin, 2010. "Cyclicality of Revenue and Structural Balances in South Africa," IMF Working Papers, International Monetary Fund 10/216, International Monetary Fund.


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