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The Elasticity of Taxable Income: The case of South Africa

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  • Johannes H. Kemp

Abstract

A key tax policy parameter that has received much attention in the international literature, but about which there is substantial uncertainty, is the overall elasticity of taxable income. The size of this parameter is central to the formulation of tax and transfer policy, as well as for the study of the welfare implications of tax decisions. This paper uses a panel of individual tax returns for the period 2009–2013 and the phenomenon of “bracket creep” to construct instrumental variable estimates of the sensitivity of income to changes in tax rates. Estimates suggest that the overall elasticity of taxable income is approximately 0.3, while that of broad income is significantly lower. The overall response is primarily driven by the elastic response of taxable income for high‐income earners, who have an elasticity of closer to 0.4. Using the elasticity estimates within an optimal tax framework, it is determined that the optimal marginal tax rate for the top 10% of income earners is broadly in line with the current income tax schedule. However, results also suggest that there is little scope for raising marginal rates on high‐income earners further without inducing a negative revenue response.
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Suggested Citation

  • Johannes H. Kemp, 2017. "The Elasticity of Taxable Income: The case of South Africa," ERSA Working Paper Series 702, Economic Research Southern Africa.
    • Handle: RePEc:rza:ersawp:702
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    2. Havemann, Roy & Hollander, Hylton, 2024. "Fiscal policy in times of fiscal stress (or what to do when r > g)," Journal of Policy Modeling, Elsevier, vol. 46(5), pages 1020-1054.
    3. José Félix Sanz Sanz, 2025. "Measuring the effectiveness of statutory tax rates as generators of revenue and progressivity," Working Papers 2025-13, FEDEA.
    4. Maria Jouste & Tina Kaidu Barugahara & Joseph Okello Ayo & Jukka Pirttilä & Pia Rattenhuber, 2021. "The effects of personal income tax reform on employees' taxable income in Uganda," WIDER Working Paper Series wp-2021-11, World Institute for Development Economic Research (UNU-WIDER).
    5. Marko Ledić & Ivica Rubil, 2026. "How do indirect taxes reshape tax-benefit-revealed social preferences for redistribution?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 53(1), pages 167-199, February.
    6. Neryvia Pillay Bell, 2020. "Taxpayer responsiveness to taxation: Evidence from bunching at kink points of the South African income tax schedule," WIDER Working Paper Series wp-2020-68, World Institute for Development Economic Research (UNU-WIDER).
    7. Aroop Chatterjee & Léo Czajka & Amory Gethin, 2021. "A Wealth Tax for South Africa," World Inequality Lab Working Papers halshs-03131182, HAL.
    8. Maria Jouste & Tina Kaidu Barugahara & Joseph Ayo Okello & Jukka Pirttilä & Pia Rattenhuber, 2025. "Taxpayer response to greater progressivity: evidence from personal income tax reform in Uganda," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 32(4), pages 1177-1212, August.
    9. Chloe Allison & Neryvia Pillay, 2024. "Cash transfers and prices what is the impact of social welfare on prices," Working Papers 11057, South African Reserve Bank.
    10. Nadine Riedel & Ida Zinke, 2025. "On the redistributive impact of the personal income tax: Evidence from South Africa," WIDER Working Paper Series wp-2025-17, World Institute for Development Economic Research (UNU-WIDER).
    11. Johannes Hermanus Kemp, 2020. "The elasticity of taxable income: New data and estimates for South Africa," WIDER Working Paper Series wp-2020-29, World Institute for Development Economic Research (UNU-WIDER).
    12. Kyle McNabb & Hazel Granger, 2023. "The taxation of employment income in African countries: Findings from a new dataset," Journal of International Development, John Wiley & Sons, Ltd., vol. 35(7), pages 1595-1618, October.

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    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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