Modelling value-added tax (VAT) in South Africa: Assessing the distributional impact of the recent increase in the VAT rate and options for redress through the benefits system

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: Using SAMOD, a tax-benefit microsimulation model for South Africa, this paper examines the joint distributional impact of the increase in the value-added tax (VAT) rate and increases in benefit amounts in 2018. Although poverty and inequality did not increase overall, the poorest still saw a reduction in their purchasing power, as many of those in the lowest decile do not receive any social benefits. The paper then explores the consequences of eliminating zero-rating in VAT and using the generated revenues to finance new social benefits. The results suggest that a policy package of a uniform VAT and an expanded set of social benefits would lead to reduced poverty and inequality in comparison to the current practice of zero rating of some consumption goods in the VAT. The findings demonstrate the superiority of using direct taxes and benefits as opposed to provisions in indirect taxes in achieving redistribution.

The distributional impact of tax and benefit systems in five African countries

“…6. See Gcabo et al (2019) for an example of an earlier version of the South African model that does simulate value-added tax (though not excise duties), which is underpinned by a different (older) dataset.…”

Strengthening the tax system to reduce inequalities and increase revenues in South Africa

“…A recent assessment of a potential VAT rate increase shows that high-income deciles would be more affected than low-income deciles. The simulation by Gcabo et al (2019) indicates that the lowest decile is, however, affected even after the increase in social grants (Figure 16). Nonetheless, as many adults and youth do not benefit from social transfers, it is preferable for political acceptability to maintain the preferential VAT regime, except with respect to diesel and petrol given their negative impact on climate, and to better target transfers to low-income households (i.e.…”

Assessing the distributional impact of lowering the value-added tax rate for standard-rated items in Tanzania and options for recouping revenue losses

“…Keen 2013;Mirrlees et al 2011) and has been discussed in relation to South Africa (e.g. Gcabo et al 2019). However, this is outside the scope of this paper and the initial objectives of the TRA.…”