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Efficiency of Optimal Taxation in a Dynamic Stochastic Environment: Case of South Africa

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  • Jacques Kibambe Ngoie

    ()
    (Department of Economics, University of Pretoria)

  • Niek Schoeman

    ()
    (Department of Economics, University of Pretoria)

Abstract

This study investigates the optimality hypothesis of taxation and the volatility thereof in South Africa when using appropriate tax rates within a dynamic stochastic environment. Using a Marshallian macroeconomic model disaggregated by sectors (MMM-DA) several features of the South African economy are analysed that may contribute to the efficiency of the optimal taxation hypothesis. The results show that within a tax regime where revenue from labour and capital income constitutes the most significant source of government income, both such taxes distort the economy but that the distortion from a tax on capital exceeds that of a tax on income. This study has twofold implications. It highlights the impact of efficient optimal taxation on both overall economic growth and fiscal policy in the country.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201218.

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Length: 17 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:pre:wpaper:201218

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Keywords: Optimality hypothesis; Dynamic stochastic environment; Marshallian macroeconomic model;

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  1. Bizer, David S & Judd, Kenneth L, 1989. "Taxation and Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 79(2), pages 331-36, May.
  2. Robert J. Barro & Chaipat Sahasakul, 1983. "Measuring the Average Marginal Tax Rate from the Individual Income Tax," NBER Working Papers 1060, National Bureau of Economic Research, Inc.
  3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 940-71, October.
  4. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Robert J. Barro & Chaipat Sahasakul, 1983. "Measuring the Average Marginal Tax Rates from Social Security and the Individual Income Tax," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 29, Chicago - Center for Study of Economy and State.
  6. Andrew B. Abel, 2007. "Optimal Capital Income Taxation," NBER Working Papers 13354, National Bureau of Economic Research, Inc.
  7. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, Elsevier, vol. 28(1), pages 59-83, October.
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