How Buoyant Is the South African Tax System? An ARDL Approach

22 September 2020
Publication Type: Working Paper
Economic Theme: Public Finance
JEL Code: E62, H29, H68, I25, O43, O57, P16

This study aims to scrutinize the responsiveness of the South African tax system to changes in economic performance. The study made use of annual time series data spanning from 1995 – 2017. The tax system was found to be fairly buoyant, albeit there is still room for improvement. The ARDL bounds test results indicate that VAT revenue and custom duties grow at a faster pace than the growth in final household consumption and import value, respectively. VAT revenue has a long run buoyancy coefficient of 1.35 while custom duties have a long run buoyancy coefficient of 1.42. This implies that VAT revenue and custom duties are perfectly elastic to variations in their respective bases, at least in the long run. The estimated buoyancy coefficient for total tax revenue growth is 0.82, implying that the growth in total tax revenue did not match the growth of the economy during the estimation period. The government can improve the efficiency and responsiveness of the tax system through good governance and strong political leadership. Furthermore, structural economic reforms are necessary to boost growth and tax revenue mobilisation.

Working paper 835
1 September 2020