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Changes in the optimal tax rate in South Africa prior and subsequent to the global recession period

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  • Motloja, Lehlohonolo
  • Makhoana, Tsholofelo
  • Kassoma, Rooyen
  • Houdman, Rozadian
  • Phiri, Andrew

Abstract

Following the global recession period of 2009, much debate has been cast on the role of tax policy in improving economic growth in the South African economy. In our paper, we estimate optimal tax rates for South Africa using the optimization model of Scully (1996, 2003) applied to quarterly data collected for periods before the crisis (i.e. 1994:Q1 – 2009:Q2) and for periods after the crisis (2009:Q2 – 2016:Q2). We estimate our optimization model using the autoregressive distributive lag (ARDL) bounds test approach. Our empirical estimates reveal an insignificant relationship between taxation and economic growth for periods prior to the global recession period whereas we find a significant relationship for periods subsequent to the recession, with an optimal rate of tax being found to be 22 percent of GDP. These empirical results highlight that whilst tax policy had an insignificance effect on economic growth in South Africa before the recession of 2009, tax policy appears to play an important role in promoting short-run and long-run economic growth in the post-recession era. Furthermore, our results suggest that fiscal authorities should ensure that tax revenue as a share of GDP should do not exceed the optimal rate of 22 percent in the interest of attaining higher rates of economic growth.

Suggested Citation

  • Motloja, Lehlohonolo & Makhoana, Tsholofelo & Kassoma, Rooyen & Houdman, Rozadian & Phiri, Andrew, 2016. "Changes in the optimal tax rate in South Africa prior and subsequent to the global recession period," MPRA Paper 74342, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:74342
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    File URL: https://mpra.ub.uni-muenchen.de/74342/1/MPRA_paper_74342.pdf
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    References listed on IDEAS

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    1. Marc Tomljanovich, 2004. "The Role of State Fiscal Policy in State Economic Growth," Contemporary Economic Policy, Western Economic Association International, vol. 22(3), pages 318-330, July.
    2. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    3. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    4. Scully, Gerald W, 1995. "The "Growth Tax" in the United States," Public Choice, Springer, vol. 85(1-2), pages 71-80, October.
    5. Black, Philip & Calitz, Estian & Steenkamp, Tjaart, 2015. "Public Economics," OUP Catalogue, Oxford University Press, edition 6, number 9780199059089.
    6. Ojede, Andrew & Yamarik, Steven, 2012. "Tax policy and state economic growth: The long-run and short-run of it," Economics Letters, Elsevier, vol. 116(2), pages 161-165.
    7. Andrew Phiri, 2016. "The Growth Trade-off between Direct and Indirect Taxes in South Africa: Evidence from a STR Model," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 14(3 (Fall)), pages 233-250.
    8. Roderick Hill, 2008. "Optimal taxation and economic growth: a comment," Public Choice, Springer, vol. 134(3), pages 419-427, March.
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    Cited by:

    1. Yawovi Mawussé Isaac Amedanou, 2019. "Optimal Taxation and Economic Growth in Togo: Empirical Investigation in Time Series [Taxation Optimale et Croissance Economique au Togo : une Evidence Empirique en Séries Temporelles]," Post-Print hal-01990213, HAL.

    More about this item

    Keywords

    Tax; Economic growth; Fiscal Policy; Optimal tax rate; Optimal government size; South Africa; Sub-prime crisis; Global recession;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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