IDEAS home Printed from https://ideas.repec.org/p/rza/wpaper/397.html
   My bibliography  Save this paper

Measuring the Impact of Marginal Tax Rate Reform on the Revenue Base of South Africa Using a Microsimulation Tax Model

Author

Listed:
  • Yolandé van Heerden and N.J. Schoeman

Abstract

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 Africa’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.

Suggested Citation

  • Yolandé van Heerden and N.J. Schoeman, 2013. "Measuring the Impact of Marginal Tax Rate Reform on the Revenue Base of South Africa Using a Microsimulation Tax Model," Working Papers 397, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:397
    as

    Download full text from publisher

    File URL: http://www.econrsa.org/node/814
    Download Restriction: no

    More about this item

    Keywords

    microsimulation; tax efficiency; optimal tax; tax reform; personal income tax;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: http://edirc.repec.org/data/ersacza.html .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.