Does South Africa’s tax effort fall short of its tax capacity?

The main objective of this study is to assess South Africa’s tax revenue performance. This is achieved by estimating tax capacity and tax effort for the period 1960–2017 through econometric methods. The 2Stage-Least Square results indicate that GDP per capita and inflation have a strong positive and statistically significant impact on revenue mobilisation while population growth, trade openness and agriculture share in GDP have a strong negative and statistically significant impact on revenue mobilisation. Furthermore, we find that South Africa’s tax effort index varies between 0.92 which is below capacity and 1.10 which is above capacity. On average, the tax effort index is 1.00, implying that South Africa performs well above its potential tax capacity. This study therefore cautiously advice against increases in tax rates in the near term as they will discourage economic activity in the form of labour, output and investment. Experiences elsewhere attest that higher tax rates often induce tax avoidance and evasion, creating about their own problems than solutions.