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Nonlinear Tax Elasticities And Their Implications For The Structural Budget Balance

Author

Listed:
  • Charl Jooste

    (Department of Economics, University of Pretoria)

  • Ruthira Naraidoo

    (Department of Economics, University of Pretoria)

Abstract

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.

Suggested Citation

  • Charl Jooste & Ruthira Naraidoo, 2010. "Nonlinear Tax Elasticities And Their Implications For The Structural Budget Balance," Working Papers 201022, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201022
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    Cited by:

    1. Charl Jooste & Marina Marinkov, 2012. "South Africa'S Transition To A Consolidated Budget," South African Journal of Economics, Economic Society of South Africa, vol. 80(2), pages 181-199, June.
    2. Burcu Aydin, 2010. "Performance of Fiscal Accounts in South Africa in a Cross-Country Setting," IMF Working Papers 2010/217, International Monetary Fund.
    3. Burcu Aydin, 2010. "Cyclicality of Revenue and Structural Balances in South Africa," IMF Working Papers 2010/216, International Monetary Fund.

    More about this item

    Keywords

    structural budget balance; tax elasticities; nonlinearity; Smooth Transition Regression; Autoregressive Distributed Lag;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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