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

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  • Jacques K. Ngoie
  • Niek Schoeman

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.

Suggested Citation

  • Jacques K. Ngoie & Niek Schoeman, 2012. "Efficiency of Optimal Taxation in a Dynamic Stochastic Environment: Case of South Africa," Working Papers 287, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:287
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    File URL: http://www.econrsa.org/node/310
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    References listed on IDEAS

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    1. Barro, Robert J & Sahasakul, Chaipat, 1983. "Measuring the Average Marginal Tax Rate from the Individual Income Tax," The Journal of Business, University of Chicago Press, vol. 56(4), pages 419-452, October.
    2. Bizer, David S & Judd, Kenneth L, 1989. "Taxation and Uncertainty," American Economic Review, American Economic Association, vol. 79(2), pages 331-336, May.
    3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    4. Andrew B. Abel, 2007. "Optimal Capital Income Taxation," NBER Working Papers 13354, National Bureau of Economic Research, Inc.
    5. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    6. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    7. 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 29, Chicago - Center for Study of Economy and State.
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    More about this item

    Keywords

    Optimality hypothesis; Dynamic stochastic environment; Marshallian macroeconomic model;

    JEL classification:

    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation

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