Measuring the Impact of Marginal Tax Rate Reform on the Revenue Base of South Africa Using a Microsimulation Tax Model
This paper is primarily concerned with the revenue and tax efficiency effects of adjustments to marginal tax rates on individual income as an instrument of possible tax reform. The hypothesis is that changes to marginal rates affect not only the revenue base but also tax efficiency and the optimum level of taxes that supports economic growth. Using an optimal revenue maximising rate (based on Laffer analysis) the elasticity of taxable income is derived with respect to marginal tax rates for each taxable income category. These elasticities are then used to quantify the impact of changes in marginal rates on the revenue base and tax efficiency using a microsimulation (MS) tax model. In this first paper on the research results much attention is paid to the structure of the model and the way in which the data base has been compiled. The model allows for the dissemination of individual taxpayers by income groups, gender, educational level, age group, etc. Simulations include a scenario with higher marginal rates which is also more progressive (as in the 1998/1999 fiscal year) in which case tax revenue increases but the increase is overshadowed by a more than proportional decrease in tax efficiency as measured by its deadweight loss. On the other hand, a lowering of marginal rates (to bring South Africaâ€™s marginal rates more in line with those of its peers) improves tax efficiency but also results in a substantial revenue loss. The estimated optimal individual tax to GDP ratio to maximise economic growth (6.7 per cent) shows a strong response to changes in marginal rates and the results from this research indicate that a lowering of marginal rates would also move the actual ratio closer to its optimum level. Thus, the trade-off between revenue collected and tax efficiency should be carefully monitored when personal income tax reform is being considered.
|Date of creation:||2013|
|Contact details of provider:|| Postal: Newlands on Main, F0301 3rd Floor Mariendahl House, cnr Campground and Main Rds, Claremont, 7700 Cape Town|
Phone: 021 671-3980
Fax: +27 21 671 3912
Web page: http://www.econrsa.org/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:rza:wpaper:397. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Charles Tanton)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.