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Nonlinear Tax Elasticities And Their Implications For The Structural Budget Balance

Listed author(s):
  • 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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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
Handle: RePEc:pre:wpaper:201022
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