Distortionary effects of increased tax rates on taxable income in South Africa
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Date
2021
Authors
Rikhotso, Singita
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Abstract
With the use of tax administration data comprising a panel of more than 230000 individuals,
this paper primarily investigates the consequences of personal income tax rate hikes in South
Africa. It employs the prominently used elasticity of taxable income framework- together with
revenue principles consistent with the basic concepts of the Laffer curve- to gauge the effect
of the 2017/2018 personal income tax rate reform on reported taxable income and, ultimately,
tax revenue collection. The findings give significantly high elasticity of taxable income values
ranging between 0.99 and 1.95, values that show sensitivity to the sample used. The estimates
suggest a loss of revenue in excess of R6 billion following the tax reform and reveal that the
highest income earners are already being taxed beyond the optimal tax rate. These results show
that the extent to which South Africa can rely on personal income tax rate hikes for increased
revenue collection is very limited.
Description
A research report submitted in partial fulfilment of the requirements for the degree of Master of Commerce (Economics)-50% to the Faculty of Commerce, Law and Management, School of Economic and Business Sciences, University of the Witwatersrand, Johannesburg, 2021