MEASURING THE OUTCOMES OF TAX REFORM

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Main insight and concluding remarks

Taxable income elasticity is used to calculate efficiency cost (deadweight loss) as well as the revenue and growth-maximising tax rates. Efficiency cost is minimised by optimal tax policies. The taxable income elasticity indicates by how much tax rates should increase to maximise revenue. Efficiency cost comes from the distortion of individual behaviour that becomes evident with rising taxes.
From the literature, calculated taxable income elasticity ranges between 0.2 and 1.15. With the lack of micro tax data in South Africa, a different methodology is used to derive the taxable income elasticity with the optimum tax rate and the inverted Pareto parameter. International literature estimates growth-maximising tax rates of between 20 and 30 per cent. The revenue-maximising tax rate is estimated at between 54 and 70 per cent, with Pareto coefficients ranging between 1.5 and
In the next section, the growth- and revenue-maximising tax rates are calculated for South Africa followed by the calculation of the inverted Pareto coefficients and taxable income elasticities.

TAXABLE INCOME ELASTICITY

Calculating the elasticity of taxable income to the net-of-tax rates using the difference-indifferences
methodology for South Africa is not possible due to the lack of historic micro tax data for the years when marginal tax rates changed significantly. The Alvaredo & Atkinson (2010:5) study on top income in South Africa over the period 1903 to 2005 confirms the unavailability of published tabulated data from 1994 to 2001.
The study of Steenekamp (2012a:20) also confirms the unavailability of tax data, and the latter author instead uses three elasticities for the top income group: 0.2, 0.4, and 0.8 for total taxable income as derived from the literature. The elasticities are derived by using the difference-in-differences methodology with micro data, and range between 0 and 1. For the sensitivity of the elasticities, Steenekamp does not use an average elasticity, but rather chooses three scenarios with a lower and a higher elasticity.
A different route is therefore followed by deriving elasticities from an analysis of optimum tax performance, as shown in Table 20. Equation (13) is adjusted to calculate the elasticity per taxable income group. The optimum and inverted Pareto estimates per taxable income group in the previous sections are then used.

THE USE OF ELASTICITIES IN MEASURING PROGRESSIVITY 4.8 (FAIRNESS OF THE TAX)

Progressivity is affected by marginal tax rates, thresholds, and allowances. The first measurement of progressivity is where tax revenue is a function of taxable income (equation 15). A coefficient in excess of 1 indicates a progressive tax.
Another progressivity measurement is the elasticity of revenue with changes in tax rates: the marginal tax rate divided by the average tax rate (equation 7). The ratio increases if government allows more tax relief through an increase in deductions, therefore decreasing progressivity.
A last progressivity measurement is the GDP/capita multiple of the top income band. If the multiple of the top income band increases, then progressivity decreases (Steenekamp, 2012b:45). These progressivity measurements are applied in the next chapter to affect tax reform scenarios and to estimate and compare the progressivity of taxes.

CHAPTER 1 1 GENERAL INTRODUCTION
1.1 BACKGROUND
1.2 PROBLEM STATEMENT
1.3 RESEARCH QUESTIONS.
1.3.1 Theoretical questions answered by this study:
1.3.2 Policy questions answered by this study: .
1.4 SIGNIFICANCE OF THE STUDY
1.5 CONCEPTUALISATION
1.6 RESEARCH METHODOLOGY
1.7 LIMITATIONS TO THIS STUDY AND ASSUMPTIONS
1.8 SEQUENCE OF CHAPTERS
1.9 RESEARCH ETHICS
CHAPTER 2 LITERATURE REVIEW ON PERSONAL INCOME TAX REFORM
2.1 INTRODUCTION
2.2 CONCEPTUAL ISSUES RELATED TO INDIVIDUAL INCOME TAX
2.2.1 Main insights and conclusion .
2.3 PERSONAL INCOME TAX REFORM
2.3.1 Defining tax reform
2.3.2 Different reasons for tax reform
2.3.3 Different approaches to tax reform
2.3.4 Properties of a good tax system that form the basis of tax reform
2.3.6.1 Brain drain of taxpayers
2.3.6.2 Improving revenue flows
2.3.6.3 Non-taxable threshold and taxable income brackets
2.3.6.4 Tax rates
2.3.6.5 Taxes and health care reform
2.3.7 Main insight and concluding remarks
2.4 COMPARATIVE OVERVIEW OF TAX STRUCTURES AND TAX REFORM IN A SELECTION OF OTHER COUNTRIES
CHAPTER 3  TAX STRUCTURES IN SOUTH AFRICA 
3.1 INTRODUCTION
3.2 HISTORICAL OVERVIEW OF INCOME TAX PRACTICES IN SOUTH AFRICA
3.3 CONCEPTUAL ISSUES RELATED TO INDIVIDUAL INCOME TAX IN SOUTH AFRICA
3.3.1 A profile of sources of household income
3.3.2 A profile of tax rate changes
3.3.3 Inflation and personal income tax growth
3.3.4 Tax revenue/GDP ratio
3.3.5 Threshold and GDP per capita.
3.4 CONCLUSION
CHAPTER 4 . MEASURING THE OUTCOMES OF TAX REFORM
4.2 DEFINITION OF TAX ELASTICITY
4.3 DIFFERENT TAX ELASTICITIES
4.3.1 Personal Income Tax elasticity
4.3.2 Tax elasticities with tax allowances and deductions .
4.3.3 Tax elasticity with changes in the tax rates
4.3.4 Taxable income elasticity with respect to net-of-tax rate .
4.3.5 Main insight and concluding remarks
4.4 PERSONAL INCOME TAX ELASTICITIES FOR SOUTH AFRICA .
4.5 CALCULATION OF THE REVENUE- AND GROWTH-MAXIMISING TAX RATES AND THE DEADWEIGHT LOSS FOR SOUTH AFRICA
4.6 INVERTED PARETO ESTIMATE
4.7 TAXABLE INCOME ELASTICITY
4.8 THE USE OF ELASTICITIES IN MEASURING PROGRESSIVITY (FAIRNESS OF THE TAX)
4.9 CONCLUSION
CHAPTER 5  MICRO-SIMULATION MODELLING FRAMEWORK
CHAPTER 6 TESTING DIFFERENT TAX POLICY OPTIONS
CHAPTER 7  SUMMARY, CONCLUSIONS, AND POLICY RECOMMENDATIONS
8. LIST OF REFERENCES

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PERSONAL INCOME TAX REFORM TO SECURE THE SOUTH AFRICAN REVENUE BASE USING A MICRO-SIMULATION TAX MODEL