Restructuring value-added tax in South Africa : a computable general equilibrium analysis

no abstract availableThesis (DCom)--University of Pretoria, 2005.EconomicsDComUnrestricte

Modelling the impact of CO2 taxes in combination with the Long Term Mitigations Scenarios on Emissions in South Africa using a dynamic computable general equilibrium model

A dynamic computable general equilibrium (CGE) model is used to analyse the impact on the economy of taxes on CO2 emissions combined with the Long Term Mitigation Scenarios. A sales tax is used to model the impact of a CO2 tax. The mitigation scenarios modelled include structural shifts (for example switching from coal-fired electricity plants to nuclear power stations), changes in energy efficiency and changes in investment required. The extent of the structural shifts, changes in energy efficiency and investment required differs from scenario to scenario. The results for the mitigation scenarios indicate that the mitigation scenarios have a positive impact on GDP when investment is large. Although economic activity initially declines due to improved energy efficiency, it is followed by a period of economic expansion as lower prices increases output in most industries – this is especially the case when it is combined with higher investment. When CO2 taxes are levied the economic impact is again positive if this is combined with either tax relief or reinvestment of the additional tax revenue. The scenarios have varied impact on labour, in general employment for semi- and unskilled labour rise if investment is higher. In most scenarios the demand for energy declines, especially for coal and petroleum. However, the demand for electricity increases if investment rises significantly. When the mitigation scenarios is combined with a CO2 tax the results indicate that the CO2 tax is effective in reducing output of CO2 producing industries as it changes the relative price of the commodities produced by these industries. However, the sales tax is distortionary as it introduces price wedges in the economy while consumers may end up paying large portions of the tax. A CO2 tax may not be the most appropriate tool to achieve the desired results considering the economic development objectives of South Africa. However, when combined with the LTMS framework its negative impact is negated by higher investment and GDP growth

An Analysis of South Africa's Value Added Tax

In this paper, the authors describe South Africa's value added tax (VAT), showing that (1) the VAT is mildly regressive, and (2) it is an effective source of government revenue, compared with other tax instruments in South Africa. They evaluate the VAT in the context of other distortions in the economy by computing the marginal cost of funds-the effect of raising government revenue by increasing the VAT rates on household welfare. Then they evaluate alternative, revenue-neutral tax systems in which they reduce the VAT and raise income taxes. For the analysis, the authors use a computable general equilibrium (CGE) model with detailed specification of South Africa's tax system. Households are disaggregated into income deciles. They demonstrate that alternative tax structures can benefit low-income households without placing excess burdens on high-income households.

Wage Subsidy and Labour Market Flexibility in South Africa Delfin S. Go, Marna Kearney, Vijdan Korman, Sherman Robinson and Karen Thierfelder

In this paper, we use a highly disaggregate general equilibrium model to analyse the feasibility of a wage subsidy to unskilled workers in South Africa, isolating and estimating its potential employment effects and fiscal cost. We capture the structural characteristics of the labour market with several labour categories and substitution possibilities, linking the economy-wide results on relative prices, wages, and employment to a micro-simulation model with occupational choice probabilities in order to investigate the poverty and distributional consequences of the policy. The impact of a wage subsidy on employment, poverty, and inequality in South Africa depends greatly on the elasticities of substitution of factors of production, being very minimal if unskilled and skilled labour are complements in production. The desired results are attainable only if there is sufficient flexibility in the labour market. Although the impact in a low case scenario can be improved by supporting policies that relax the skill constraint and increase the production capacity of the economy especially towards labour-intensive sectors, the gains from a wage subsidy are still modest if the labor market remains very rigid.

Wage subsidy and labor market flexibility in south Africa

In this paper, the authors use a highly disaggregate general equilibrium model to analyze the feasibility of a wage subsidy to unskilled workers in South Africa, isolating and estimating its potential employment effects and fiscal cost. They capture the structural characteristics of the labor market with several labor categories and substitution possibilities, linking the economy-wide results on relative prices, wages, and employment to a micro-simulation model with occupational choice probabilities in order to investigate the poverty and distributional consequences of the policy. The impact of a wage subsidy on employment, poverty, and inequality in South Africa depends greatly on the elasticities of substitution of factors of production, being very minimal if unskilled and skilled labor are complements in production. The desired results are attainable only if there is sufficient flexibility in the labor market. Although the impact in a low case scenario can be improved by supporting policies that relax the skill constraint and increase the production capacity of the economy especially towards labor-intensive sectors, the gains from a wage subsidy are still modest if the labor market remains very rigid.Labor Markets,Labor Policies,,Economic Theory&Research,Access to Finance

Economy-wide and distributional impacts of an oil price shock on the south African economy

As crude oil prices reach new highs, there is renewed concern about how external shocks will affect growth and poverty in developing countries. This paper describes a macro-micro framework for examining the structural and distributional consequences of a significant external shock-an increase in the world price of oil-on the South African economy. The authors merge results from a highly disaggregative computable general equilibrium model and a micro-simulation analysis of earnings and occupational choice based on socio-demographic characteristics of the household. The model provides changes in employment, wages, and prices that are used in the micro-simulation. The analysis finds that a 125 percent increase in the price of crude oil and refined petroleum reduces employment and GDP by approximately 2 percent, and reduces household consumption by approximately 7 percent. The oil price shock tends to increase the disparity between rich and poor. The adverse impact of the oil price shock is felt by the poorer segment of the formal labor market in the form of declining wages and increased unemployment. Unemployment hits mostly low and medium-skilled workers in the services sector. High-skilled households, on average, gain from the oil price shock. Their income rises and their spending basket is less skewed toward food and other goods that are most affected by changes in oil prices.Economic Theory&Research,,Labor Policies,Markets and Market Access,Access to Finance

Assessing Development Strategies to Achieve the MDGs in The Republic of South Africa

South Africa was readmitted to the international community after successful free elections in April 1994 following years of international isolation imposed on the country due to its racially motivated apartheid policies. Trade liberalization has been accompanied by responsible monetary and fiscal management and this has largely allowed South Africa to continuously experience moderate economic growth since 1994. Inflation has been within target, and the budget deficit has been falling in recent times. Since 1994, the government has channelled substantial resources into social programs and services. Despite these impressive policy reforms, the economy has failed to grow in sufficient amounts to make inroads into the high unemployment and poverty (Hoogeveen and Özler, 2004). Following the 2004 elections the government has outlined five key development goals in the Government's Contract with the People of South Africa, namely: · Reduce poverty by half through economic development, comprehensive social security, land reform and improved household and community assets; · Provide the skills required by the economy, build capacity and provide resources across society; · Reduce unemployment by half through new jobs, skills development, assistance to small businesses, opportunities for self-employment and sustainable community livelihoods; · Massively reduce cases of TB, diabetes, malnutrition and maternal deaths, turn the tide against HIV and AIDS, strive to eliminate malaria and improve services to achieve a better national health profile; and · Reduce preventable causes of death, including violent crime and road accidents. Furthermore, government adopted the UN Millennium Declaration alongside other countries as an unprecedented declaration of solidarity to rid the world of poverty. This declaration is encapsulated in the Millennium Development Goals (MDGs). Heads of states agreed in 2000 to use the MDGs to work together to reduce poverty by 2015 or earlier. The MDGs provide an indication of the results that the country wants to obtain (outcomes) based on certain inputs (resources), outputs (understanding of activities and changes) and impact (change/effect of intervention). Some of the outcomes indicators as expressed by the MDGs are closely related to the rights that are mentioned in the Constitution. This paper is linked to the project entitled “Realizing the Millennium Development Goals through Socially Inclusive Macroeconomic Policies” which aims to answer three key questions relating to South Africa achieving its MDGs, namely what is the likelihood of South Africa achieving the goals under current policies and investments? What changes in South Africa’s strategies and policies are required to achieve these goals? What are the costs of the different strategies, policies, and investment alternatives? This project is a joint collaboration between UNDP, UN-DESA and the World Bank. The benefits of this project are more than providing the answers to the questions mentioned above. The methodology used is a comprehensive framework to evaluate developmental policies as it links the various developmental objectives and may be applied to other policy questions and strategies within South Africa for example evaluating the success and cost of AsgiSA, as well as the Medium Term Strategic Framework (MTSF) and the New Growth Path policy. The capacity building objective of this project is also very important for South Africa as it enables South Africa to build its own capacity in this field. In conformity with the brief provided by UN-DESA, this Country Background Report includes an overview of the main reforms, macroeconomic policy, economic performance and vulnerabilities, social policy and MDG achievement in South Africa. The report is divided into nine sections. The first section provides a brief introduction. The second section offers details of economic reforms and policy during the period 1994 to 2008, as well as an overview of the performance of the economy during the same period. The third section discusses the economic constraints and vulnerabilities within the South African economy. The fourth section provides a brief summary of the status of achieving the MDGs in South Africa, attempts to identify gaps in achieving the MDGs as well as policies that may assist South Africa to achieve the MDGs. The next section, section five, provides a brief description of the methodology used and section six discusses the data used and data problems experienced. Section seven is the main section of the report and provides the results of the General Equilibrium Analysis the analysis of which attempts to answer the questions listed above. Section eight discusses the results relating to the poverty reduction goal. The last section, section five provides a brief conclusion and policy recommendations

Assessing Development Strategies to Achieve the MDGs in The Republic of South Africa

In conformity with the brief provided by UN-DESA, this Country Background Report includes an overview of the main reforms, macroeconomic policy, economic performance and vulnerabilities, social policy and MDG achievement in South Africa. The report is divided into nine sections. The first section provides a brief introduction. The second section offers details of economic reforms and policy during the period 1994 to 2008, as well as an overview of the performance of the economy during the same period. The third section discusses the economic constraints and vulnerabilities within the South African economy. The fourth section provides a brief summary of the status of achieving the MDGs in South Africa, attempts to identify gaps in achieving the MDGs as well as policies that may assist South Africa to achieve the MDGs. The next section, section five, provides a brief description of the methodology used and section six discusses the data used and data problems experienced. Section seven is the main section of the report and provides the results of the General Equilibrium Analysis the analysis of which attempts to answer the questions listed above. Section eight discusses the results relating to the poverty reduction goal. The last section, section five provides a brief conclusion and policy recommendations

Zero-rating food in South Africa : a computable general equilibrium analysis

Zero-rating food is considered to alleviate poverty of poor households who spend the largest proportion of their income on food. However, this will result in a loss of revenue for government. A Computable General Equilibrium (CGE) model is used to analyze the combined effects on zero-rating food and using alternative revenue sources to compensate for the loss in revenue. To prohibit excessively high increases in the statutory VAT rates of business and financial services, increasing direct taxes or increasing VAT to 16 per cent, is investigated. Increasing direct taxes is the most successful option when creating a more progressive tax structure, and still generating a positive impact on GDP. The results indicate that zero-rating food combined with a proportional percentage increase in direct taxes can improve the welfare of poor households

Zero-rating food in South Africa: A computable general equilibrium analysis

Zero-rating food is considered to alleviate poverty of poor households who spend the largest proportion of their income on food. However, this will result in a loss of revenue for government. A Computable General Equilibrium (CGE) model is used to analyze the combined effects on zero-rating food and using alternative revenue sources to compensate for the loss in revenue. To prohibit excessively high increases in the statutory VAT rates of business and financial services, increasing direct taxes or increasing VAT to 16 per cent, is investigated. Increasing direct taxes is the most successful option when creating a more progressive tax structure, and still generating a positive impact on GDP. The results indicate that zero-rating food combined with a proportional percentage increase in direct taxes can improve the welfare of poor households