Distortionary effects of increased tax rates on taxable income in South Africa

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.