Finding the optimum level of taxes in South Africa: A balanced budget approach

 

 

N.J. Schoeman^I; Y. van Heerden^II

^IDepartment of Economics, University of Pretoria, South Africa niek.schoeman@up.ac.za,
^IIDepartment of Economics, University of Pretoria, South Africa yolande.jordaan@up.ac.za

 

 

---

ABSTRACT

This article is primarily concerned with assessing the optimum rate of government intervention by means of tax revenue policies that would facilitate the full growth potential of the South African economy, using time series data for the period 1960 to 2007. In the analysis a balanced budget is assumed, which means that the level of expenditure is set equal to tax collection with no provision for borrowing. The results indicate that the actual average tax burden far exceeds its optimum level, and that the authorities will have to consider adjusting tax policy accordingly in order to improve the growth performance of the economy.

---

OPSOMMING

Hierdie artikel het primêr ten doel die assessering van die optimale koers van belastinginkomstebeleid wat die volle groeipotensiaal van die Suid-Afrikaanse ekonomie sal ondersteun, deur gebruik te maak van tydreeksdata oor die periode 1960 to 2007. In die analise is 'n gebalanseerde begroting aanvaar, wat beteken dat die vlak van uitgawes gelyk gestel is aan die vlak van belastinginvorderings, en geen voorsiening word gemaak vir lenings nie. Die resultate dui daarop dat die werklike gemiddelde belastingdruk die optimale vlak aansienlik oorskry, en dat die owerheid moet oorweeg om die belastingbeleid dienooreenkomstig aan te pas om die groeipotentiaal van die ekonomie te verhoog.

---

 

 

“Full text available only in PDF format” 

 

 

REFERENCES

[1] Aaron, H.J. and Slemrod, J. 1999. The South African tax system: A nation in microcosm. Brookings. Tax Notes, The Brookings Institute: www.brook.edu.         [ Links ]

[2] Abel, A.B. and Bernanke, B.S. 2005. Macroeconomics, 5^th edition, Pearson Education.         [ Links ]

[3] Agbeyegbe, T., Stotsky, J.G. and Wolde, M.A. 2004. Trade liberalization, exchange rate changes and tax revenue in Sub-Saharan Africa, International Monetary Fund IMF Working paper.         [ Links ]

[4] Barro, R.J. 1990. Government spending in a simple model of endogenous growth, Journal of Political Economy, 98, pp 103-125.         [ Links ]

[5] Barro, R.J. and Sala-I-Martin, X. 1992. Public finance in models of economic growth, The Review of Economic Studies, 59, pp 645-661.         [ Links ]

[6] Bergoeing, R., Kehoe, T. J. and Soto. R. 2002. A decade lost and found: Mexico and Chile in the 1980s, Review of Economic Dynamics, 5, pp 166-205.         [ Links ]

[7] Black, P.A., Calitz, E., and Steenkamp, T.J. 2006. Public economics for South African students, 2^nd edition, Oxford University Press.         [ Links ]

[8] Boadway, R., Bruce, N. and Mintz, J. 1984. Taxation, inflation and the effective marginal tax rate on capital in Canada, The Canadian Journal of Economics, 17(1), pp 62-79.         [ Links ]

[9] Brue, S.L. 2000. The evolution of economic thought, 6^th edition, Thompson South West.         [ Links ]

[10] Budget Review. 2008. Pretoria, Department of Finance.         [ Links ]

[11] Budget Review. 2007. Pretoria, Department of Finance.         [ Links ]

[12] Budget Review. 2006. Pretoria, Department of Finance.         [ Links ]

[13] Budget Review. 2002. Pretoria, Department of Finance.         [ Links ]

[14] Caragata, P.J. 1998. From welfare state to optimal size of government: A paradigm shift for public policy, Agenda, 5(3), pp 277-287.         [ Links ]

[15] Chao, J.C.P. and Grubel, H. 1998. Optimal levels of spending and taxation in Canada. How to use the fiscal surplus. Vancouver: Fraser Institute.         [ Links ]

[16] Clemens, J. and Veldhuis, N. 2002. Size of government. Studies in economic prosperity 1. Vancouver: The Fraser Institute.         [ Links ]

[17] Devarajan, S., Swaroop, V. and Zou, H. 1996. The composition of public expenditure and economic growth. Research Department, The World Bank, Washington, DC 20433, USA.         [ Links ]

[18] Dickey, D.A. and Fuller, W.A. 1981. Likelihood ratio statistics for autoregressive time series with a unit root, Econometrica, 49(4), pp 1057-1072.         [ Links ]

[19] Engle, R.F. and Granger C.W.J. 1987. Co-integration and error correction: Representation, estimation, and testing, Econometrica, 55(2), pp 251-276.         [ Links ]

[20] EViews 6 User's Guide II. 2007. United States of America: Quantitative Micro Software, LLC.         [ Links ]

[21] Fan, J. and Marron, J.S. 1994. Fast implementations of nonparametric curve estimators, Journal of Computational and Graphical Statistic, 3(1), pp 35-56.         [ Links ]

[22] Fatas, A. and Mihiv, I. 2000. Government size and automatic stabilizers: International and intranational evidence, Journal of International Economics, 55, pp 3-28.         [ Links ]

[23] Feldstein, M. 2006. The effect of taxes on efficiency and growth, National Bureau of Economic Research Working Paper No. 12201.         [ Links ]

[24] Harris, R.I.D. 1995. Using cointegration analysis in econometric modelling, Prentice Hall.         [ Links ]

[25] Hayfield, T. and Racine J.S. 2008. Nonparametric econometrics: The np package, Journal of Statistical Software, 27(5), URL http://jstatsoft.org/v27/i05/.         [ Links ]

[26] Hood, R., Husband, D. and Yu, F. 2002. Recurrent expenditure requirements of capital projects: Estimation for budget purposes, The World Bank. Policy Research Working Paper No. WPS2938.         [ Links ]

[27] Katz Commission. 1999. Interim reports of the Katz Commission into certain aspects of the tax structure of South Africa, Government Printer, Pretoria.         [ Links ]

[28] Kennedy, P.E. 2000. On measuring the growth-maximizing tax rate, Pacific Review, 5(1), pp 89-91.         [ Links ]

[29] Koch, S. F., Schoeman, N.J. and Tonder, J.J. 2005. Economic growth and the structure of taxes in South Africa: 1960-2002. The South African Journal of Economics, 73(2), pp 190-210.         [ Links ]

[30] Laffer, A. 2004. The Laffer curve: Past, present and future, Executive Summary Backgrounder.         [ Links ]

[31] Li, Q. and Racine, J.S. 2007. Nonparametric econometrics, Princeton University Press, pp 26-29.         [ Links ]

[32] Mackness, W. 1999. Fraser Institute study makes the case for smaller more efficient government, The Fraser Institute, The Fraser Forum Online.         [ Links ]

[33] MacKinnon, J.G. 1991. Critical values for cointegration tests. In long run economic relationships, London, Oxford University Press, pp 267-276.         [ Links ]

[34] Manual, T.A. 2002. The South African tax reform experience since 1994, Annual Conference of The International Bar Association. National Treasury, Communications and Media, Speeches.         [ Links ]

[35] Margo Commision. 1987. Report of the Commission of Inquiry into the tax structure of the Republic of South (Chairman: C.S. Margo). RP34/1987, Pretoria: Government Printer.         [ Links ]

[36] Mavrov, H. 2007. The size of government expenditure and the rate of economic growth in Bulgaria, Journal of Economic Alternatives, Issue 1EN/2007.         [ Links ]

[37] Mirrlees, J.A. 1971. An exploration in the theory of optimum income taxation, Review of Economic Studies, Blackwell Publishing, 38 (April), pp 175-208.         [ Links ]

[38] Mitchell, D.J. 1996. How to measure the revenue impact of changes in tax rates. The Heritage Foundation. Backgrounder number 1090.         [ Links ]

[39] Mitchell, D.J. 2001. Lowering marginal tax rates: The key to pro-growth tax relief. The Heritage Foundation, Backgrounder number 1443.         [ Links ]

[40] OECD. 2003. African economic outlook, African Economic Outlook Report.         [ Links ]

[41] Pevcin, P. 2004. Does optimal size of government spending exist?, University of Ljubljana, European Group of Public Administration, Study Group on Public Finance and Management.         [ Links ]

[42] Peden, E.A. and Bradley, M.D. 1989. Government size, productivity, and economic growth: The post-war experience, Public Choice 61, pp 229-245.         [ Links ]

[43] R Development Core Team. 2008. R: A language and environment for statistical computing, R Foundation for Statistical Computing, Vienna, Austria, ISBN 3-900051-07-0, URL http://www.R-project.org.         [ Links ]

[44] Rosen, H.S. 2005. Public finance, 7^th edition, McGraw-Hill International.         [ Links ]

[45] SARB (South African Reserve Bank). Various issues of the Quarterly Bulletin, Pretoria.         [ Links ]

[46] Schoeman, N.J. 1995. Public debt and the economy, South African Journal of Economic and Management Sciences, 16 (Winter), pp 65-69.         [ Links ]

[47] Scully, G.W. 1991. Tax rates, tax revenues and economic growth. Policy Report 98. Dallas, TX: National Centre for Policy Analysis.         [ Links ]

[48] Scully, G.W. 1996. Taxation and economic growth in New Zealand, Pacific Economic Review, 1(2), pp 169-177.         [ Links ]

[49] Scully, G.W. 2000. The growth-maximising tax rate, Pacific Economic Review, 5 (February), pp 93-96.         [ Links ]

[50] Scully, G.W. 2002. Government expenditure and quality of life. Public Choice, 108, pp 123-145.         [ Links ]

[51] Scully, G.W. 2003. Optimal taxation, economic growth and income inequality, Public Choice, 115, pp 299-312.         [ Links ]

[52] Vedder, R.K. and Gallaway, L. 1998. Government size and economic growth, Washington: Joint Economic Committee.         [ Links ]

[53] World Bank. 2007. World Development Report.         [ Links ]

[54] Wing, Y. 2005. Government size and economic growth: Time-series evidence for the United Kingdom, Econometrics Working Paper: EWP0501.         [ Links ]

 

 

*Corresponding author
1 The author was enrolled for an MCom (Econometrics) degree in the Department of Economics, University of Pretoria.