The benefit of aligning South Africa’s personal income tax thresholds and brackets with that of its peers using a micro-simulation tax model

Abstract

Background: This article is based on a PhD study in which a microsimulation (MS) tax model was constructed to measure the revenue and tax efficiency effects of adjustments to marginal tax rates on individual income.

Aim: The main aim with this analysis is to determine the advantages of adjustments to the thresholds and taxable income brackets in SA on revenue collected, tax efficiency, and progressivity as part of a broader tax reform effort.

Setting: Currently such changes mainly consist of adjustments to tax brackets and thresholds to account for inflation, although since the 2017/2018 budget, such adjustments have been minimised as a result of the widening in the budget deficit.

Methods: The tax brackets and thresholds for the 2005/2006 fiscal year are used as a base from which changes are implemented. Besides the base scenario, two other scenarios are simulated, based on that of South Africa’s peers (lower levels). Simulations are done with the MS tax model.

Results: The research shows that instead of only allowing for inflation adjustments, the alignment of income brackets and thresholds to levels closer to those of South Africa’s peers could be beneficial with an improvement in the efficiency of the income tax regime. More individuals could be included into the tax net, albeit at (on average) lower tax scales resulting in a marginal loss in revenue. Although such an adjustment could be interpreted as being more regressive and, therefore, negative from a ‘tax fairness’ perspective, the Personal Income Tax (PIT) burden expressed as the PIT and Gross Domestic Product (GDP) ratio would be slightly lower.

Conclusion: The possible result would be an improvement in tax liability and economic growth which could in turn fuel personal income and, therefore, revenue collected from this important tax source. This would compensate for the initial loss in PIT.