Changes in the optimal tax rate in South Africa prior and subsequent to the global recession period

Motloja, Lehlohonolo and Makhoana, Tsholofelo and Kassoma, Rooyen and Houdman, Rozadian and Phiri, Andrew (2016): Changes in the optimal tax rate in South Africa prior and subsequent to the global recession period.

Abstract

Following the global recession period of 2009, much debate has been cast on the role of tax policy in improving economic growth in the South African economy. In our paper, we estimate optimal tax rates for South Africa using the optimization model of Scully (1996, 2003) applied to quarterly data collected for periods before the crisis (i.e. 1994:Q1 – 2009:Q2) and for periods after the crisis (2009:Q2 – 2016:Q2). We estimate our optimization model using the autoregressive distributive lag (ARDL) bounds test approach. Our empirical estimates reveal an insignificant relationship between taxation and economic growth for periods prior to the global recession period whereas we find a significant relationship for periods subsequent to the recession, with an optimal rate of tax being found to be 22 percent of GDP. These empirical results highlight that whilst tax policy had an insignificance effect on economic growth in South Africa before the recession of 2009, tax policy appears to play an important role in promoting short-run and long-run economic growth in the post-recession era. Furthermore, our results suggest that fiscal authorities should ensure that tax revenue as a share of GDP should do not exceed the optimal rate of 22 percent in the interest of attaining higher rates of economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Tax; Economic growth; Fiscal Policy; Optimal tax rate; Optimal government size; South Africa; Sub-prime crisis; Global recession
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

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