DeFiPP Workshop by Tumisang Loate (University of Pretoria)

Unintended consequences of tax cuts in South Africa

Abstract

This paper provides evidence on the macroeconomic effects of personal income tax changes in South Africa. We identify episodes of policy changes using narrative information from legislative documents. We find that cuts in the marginal tax rate (MTR) are followed by a decrease in government expenditure and an output expansion. In contrast, non-MTR cuts, which primarily reflect changes in tax brackets, have no effect on government expenditure but initially lead to a contractionary in output, consumption, investment, and employment. These outcomes reflect the crowding out of credit and investment by the private sector to finance tax cuts. As a result, firms reduce their labour demand, particularly in manufacturing, trade, mining and finance sectors. These effects reverse, however, to become expansionary from the eleventh quarter onward.

Contact : Romain Houssa - Romain.Houssa@unamur.be
Télecharger : vCal