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The Elasticity of Taxable Income: The case of South Africa

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  • Johannes Hermanus Kemp

Abstract

A central tax policy parameter that has received much attention internationally, but about which there is substantial uncertainty, is the overall elasticity of taxable income. The size of this elasticity is of critical importance in 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’ as source of tax rate variation to construct instrumental variable estimates of the sensitivity of income to changes in tax rates. We find that the overall elasticity of taxable income is approximately 0.3, while that of broad income is significantly lower. This overall elasticity is primarily due to the elastic response of taxable income for taxpayers who have incomes above R380 000, who have an elasticity of closer to 0.4. The estimates suggest an optimal marginal tax rate for the top 10% of income earners that is generally 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 without inducing a negative revenue response.

Suggested Citation

  • Johannes Hermanus Kemp, 2017. "The Elasticity of Taxable Income: The case of South Africa," Working Papers 702, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:702
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    Cited by:

    1. Carina Neisser, 2017. "The elasticity of taxable income: A meta-regression analysis," Working Papers 2017/10, Institut d'Economia de Barcelona (IEB).
    2. Amina Ebrahim & Rebone Gcabo & Lilian Khumalo & Jukka Pirttilä, 2019. "Tax research in South Africa," WIDER Working Paper Series wp-2019-9, World Institute for Development Economic Research (UNU-WIDER).
    3. Maria Jouste & Tina Kaidu & 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).
    4. 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).
    5. Aroop Chatterjee & Léo Czajka & Amory Gethin, 2021. "A Wealth Tax for South Africa," World Inequality Lab Working Papers halshs-03131182, HAL.
    6. 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).

    More about this item

    Keywords

    fiscal policy; Elasticity; taxable income; optimal tax;
    All these keywords.

    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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