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Contribution of VAT to economic growth: A dynamic CGE analysis

Author

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  • Erero Jean Luc

    (Operational Research (OR) Tax, Customs and Excise Institute (TCEI) South African Revenue Service (SARS))

Abstract

Aim/purpose – This study sought to assess the impact of an increased historical fixed VAT rate of 14% to the current rate of 15% on the South African economy. Design/methodology/approach – The method applied in this study was based on a Dynamic Computable General Equilibrium (CGE) model to evaluate the impact of both the VAT rate of 14% and a new rate of 15% on the South African economy. The CGE model has been proven over the years to be a suitable model when evaluating the impact assessment of any shock within an economy. Enhancements were made by the researcher to the direct and indirect tax section of the model, i.e., the direct tax section was disaggregated, such that for both firm and household revenues, a dividend income stream is separated from other income streams. The main reason is to facilitate a detailed analysis of Corporate Income Tax (CIT) and Personal Income Tax (PIT), as well as the latest implemented Dividend Tax (DT). Findings – When VAT was increased from 14% to 15%, the immediate reaction of the shock from the Dynamic CGE model indicates that the Gross Domestic Product (GDP) declined by 0.0002% in 2018, but increased by 0.0028% in the following year (2019). The trend continued until 2021, hence the 1% increase in the VAT tax rate will increase the expected forecast of VAT collection by approximately R3.2 billion on average. Research implications/limitations – The findings of this study will be implemented by the South African government, which will use a dynamic CGE model to assess South Africa’s VAT contribution to the economy. The database of the CGE model was limited to the Social Accounting Matrix (SAM) for 2015. Originality/value/contribution – The study recommends the use of this method for assessing the impact of tax policy changes to the South African economy. The CGE model seems to be the best model as far as the impact assessment of a shock in the economy is concerned. This will assist the South African authorities with their decision making regarding future VAT revenue.

Suggested Citation

  • Erero Jean Luc, 2021. "Contribution of VAT to economic growth: A dynamic CGE analysis," Journal of Economics and Management, Sciendo, vol. 43(1), pages 22-51, January.
    • Handle: RePEc:vrs:jecman:v:43:y:2021:i:1:p:22-51:n:16
    DOI: 10.22367/jem.2021.43.02
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    References listed on IDEAS

    as
    1. Gemmell, Norman & Hasseldine, John, 2012. "The Tax Gap: A Methodological Review," Working Paper Series 18717, Victoria University of Wellington, Chair in Public Finance.
    2. Christian EBEKE & Hélène EHRHART, 2011. "Does VAT reduce the instability of tax revenues?," Working Papers 201124, CERDI.
    3. Gemmell, Norman & Hasseldine, John, 2012. "The Tax Gap: A Methodological Review," Working Paper Series 2435, Victoria University of Wellington, Chair in Public Finance.
    4. Adams, Philip D., 2005. "Interpretation of results from CGE models such as GTAP," Journal of Policy Modeling, Elsevier, vol. 27(8), pages 941-959, November.
    5. Christian EBEKE & Hélène EHRHART, 2011. "Does VAT reduce the instability of tax revenues?," Working Papers 201124, CERDI.
    6. Gordon, Roger H. & Bo Nielsen, Soren, 1997. "Tax evasion in an open economy:: Value-added vs. income taxation," Journal of Public Economics, Elsevier, vol. 66(2), pages 173-197, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    South African Revenue Service (SARS); Value Added tax (VAT); Dynamic computable general equilibrium (CGE) model;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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