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

Figures & data

Figure 1. The Laffer curve. Adopted from Agarwal (2018).

Table 1. Descriptive statistics.

	Mean	S-Deviation	Min	Max	Obs.
Tax Revenue %GDP	20.77	3.37	13.90	25.70	58
Trade Openness	52.13	7.15	37.49	72.86	58
GDP Per capita	4.67	0.05	4.53	4.75	58
Agriculture %GDP	5.14	2.60	2.08	11.01	58
Governance	6.14	2.44	4.00	9.00	58
Population growth	2.08	0.61	1.05	2.79	58
Inflation	8.06	4.93	−1.63	18.52	58
Manufacturing %GDP	18.57	3.34	11.61	22.61	58
Services %GDP	53.41	5.66	43.07	61.49	58
Corruption Index	46.79	3.78	41.00	56.80	22
Employment ratio	40.89	1.53	38.52	44.31	27
Labour force rate	53.50	0.77	52.31	55.78	28

Source: author’s computations.

Table 2. Pairwise correlation test results.

	REV	TOP	POPG	GOV	GDPP	AGR	INF	SERV	MAN	EMPL	LFPR	COR
REV	1.00
TOP	0.35 0.00*	1.00 –
POPG	−0.84 0.00*	−0.50 0.00*	1.00 –
GOV	0.74 0.01*	0.36 0.00*	−0.91 0.00*	1.00 –
GDPP	0.77 0.00*	0.56 0.00*	−0.60 0.00*	0.48 0.04**	1.00 –
AGR	−0.95 0.00*	−0.25 0.05*	0.82 0.00*	−0.78 0.00*	−0.76 0.00*	1.00 –
INF	0.23 0.00*	−0.08 0.02**	0.24 0.00*	−0.35 0.00*	0.23 0.00*	−0.14 0.00*	1.00 –
SERV	0.69 0.00*	0.30 0.00*	−0.89 0.00*	0.94 0.00*	0.49 0.00*	−0.75 0.00*	−0.45 0.00*	1.00 –
MAN	−0.68 0.00*	−0.62 0.00*	0.86 0.00*	−0.82 0.00*	−0.64 0.00	0.67 0.00*	0.36 0.01**	−0.86 0.00*	1.00 –
EMPL	0.40 0.31	0.28 0.06***	−0.18 0.00	−0.45 0.01*	0.16 0.13*	0.03 0.02**	0.28 0.01*	−0.15 0.00*	−0.01 0.02**	1.00 –
LFPR	0.81 0.00*	0.65 0.00*	−0.51 0.02**	0.16 0.38	0.65 0.00*	−0.48 0.00*	0.13 0.85	0.42 0.06***	−0.55 0.00	0.54 0.03**	1.00 –
COR	−0.32 0.14	−0.45 0.04**	0.46 0.03**	NA	−0.69 0.00*	0.81 0.00*	0.44 0.04**	−0.85 0.00	0.73 0.00	0.44 0.04**	−0.19 0.41	1.00 –

Notes: TOP – trade openness; POPG – population growth; GOV – Good governance; REV – tax revenue/GDP; GDPP – GDP per capita; LFPR – labour force participation rate; AGR – agriculture/GDP; EMPL – employment/population ratio; MAN – manufacturing/GDP; SERV – services/GDP; COR – corruption score index; INF – Inflation rate. *, **, *** indicate significance at 1%, 5% and 10%, respectively

Table 3. Stationarity tests results.

Variable	Augmented Dicker Fuller test			Phillip–Perron test
	Intercept	Trend and intercept	Order of integration	Intercept	Trend and intercept	Order of integration
REV	−1.36	−2.86		−1.32	−2.80
D(REV)	−7.52*	−7.52*	| (1)	−8.73*	−10.08*	| (1)
GDPC	−2.39	−2.56		−2.24	−2.20
D(GDPC)	−4.52*	−4.59*	| (1)	−4.56*	−4.63*	| (1)
TOP	−2.17	−2.57		−2.08	−2.48
D(TOP)	−7.36*	−7.29	| (1)	−8.22*	−8.51*	| (1)
GOV	−0.65	−1.91		−0.64	−1.91
D(GOV)	−7.55*	−7.49*	| (1)	−7.55*	−7.49*	| (1)
INF	−1.98	−2.01		−2.98**	−2.95	| (0)
D(INF)	−12.03*	−7.10*	| (1)	–	–
POPG	−0.19	−2.39		−0.33	−2.32
D(POPG)	−3.30**	−3.49**	| (1)	−2.93**	−2.93	| (1)
AGR	−3.57*	−1.63	| (0)	−3.66*	−2.33	| (0)
MAN	0.57	−2.12		0.514	−2.07
D(MAN)	−6.50*	−6.20*	| (1)	−6.47*	−7.07*	| (1)
SERV	−0.59	−1.91		−0.35	−1.55
D(SERV)	−5.48*	−5.46*	| (1)	−5.32*	−5.28*	| (1)
COR	−3.10**	−3.87**	| (0)	−3.09**	−3.79**	| (0)
LFPR	−2.97**	−3.17	| (0)	−1.95	−2.17
D(LFPR)	-	-		−4.00*	−3.94**	| (1)
EMPL	−2.41	−2.56		−1.96	−2.21
D(EMPL)	−4.19*	−4.11*	| (1)	−4.18*	−4.09*	| (1)
Critical values				Critical values
1%	−3.55	−4.12		−3.55	−4.13
5%	−2.91	−3.49		−2.91	−3.49
10%	−2.59	−3.17		−2.59	−3.17

*, **, *** indicate significance at 1%, 5% and 10%, respectively.

Table 4. Regression output.

Dependent variable: Tax-GDP Ratio
Variable	TOP	POPG	GOV	GDPP	AGR	INF	MAN	SERV	DUM	C
Coefficient	−3.51	−4.31	1.26	9.22	−2.77	0.23	−3.05	−4.58	−0.89	21.91
S.E	(1.91)***	(1.20)*	(1.02)	(5.15)***	(0.96)*	(0.04)*	(2.51)	(4.71)	(0.74)	29.61
T-stat	−1.84	−3.59	1.23	1.79	−2.88	6.02	−1.22	−0.97	−1.20	0.74

Notes: TOP – trade openness; POPG – population growth; GOV – Good governance; GDPP – GDP per capita; INF – Inflation rate; AGR – agriculture/GDP; MAN – manufacturing/GDP; SERV – services/GDP. $R^2$(0.95), DW-stat (1.74), IV tank (9). *, **, *** indicate significance at 1%, 5% and 10%, respectively.

Figure 2. Normality test results.

Table 5. Residual tests results.

Serial correlation (Breusch–Godfrey)		Heteroscedasticity (Breusch–Pagan–Godfrey)		Heteroscedasticity (Harvey)
Obs.*R	Prob. Chi (1)	Obs.*R	Prob. Chi-	Obs.*R	Prob. Chi
1.13	0.29	16.37	0.06	10.90	0.28

Source: author’s computations.

Figure 3. OLS CUSUM stability test results.

Table 6. Robustness tests results.

Dependent variable: Tax-GDP ratio
	Model (1)	Model (2)	Model (3)	Model (4)
C	3.33	−1.21	−13.01	11.50
TOP	−2.40 (1.53)	−1.79 (1.36)	1.93 (2.03)
POPG	−3.91 (1.12)*	−3.93 (1.12)*	–	−2.25 (0.95)**
GOV	0.66 (0.82)	0.76 (0.80)	–	0.29 (1.07)
GDPP	7.89 (4.96)	7.18 (4.88)	–	–
INF	0.24 (0.03)*	0.23 (0.03)*	0.01 (0.06)	0.10 (0.05)**
AGR	−2.90 (0.95)*	−3.22 (0.88)*	−0.57 (2.45)
MAN	−2.00 (2.27)	–	−6.93 (3.59)***	−8.30 (2.24)*
SERV	–	–		–
DUM	−0.79 (0.73)	−0.28 (0.46)	−1.58 (0.73)**	−1.45 (0.75)***
COR	–	–	3.90 (3.49)	–
LFPR	–	–	0.60 (0.17)*	–
EMPL	–	–	–	9.39 (4.68)***
Adj.$R^2$	0.94	0.94	0.84	0.75
F-stat	121.10	138.90	14.85	14.10
DW-stat	1.78	1.67	1.89	1.88
No of Obs.	58	58	22	27
Tank	9	8	8	7

*, **, *** indicate significance at 1%, 5% and 10%, respectively. Technique used is 2SLS (Robust S.E are in parenthesis).

Table 7. Tax effort index results for South Africa.

Date	Actual tax capacity	Potential tax capacity	Tax effort	GDP per capita
1960	14.6	14.26	1.02	316
1961	13.9	14.47	0.96	324
1962	13.9	14.58	0.95	336
1963	15.7	14.40	1.09	363
1964	15.3	15.57	0.98	388
1965	15.6	15.46	1.01	413
1966	15.4	15.85	0.97	438
1967	16.1	15.39	1.05	475
1968	15.9	16.00	0.99	500
1969	15.9	16.61	0.96	548
1970	16.2	17.25	0.94	585
1971	17	17.53	0.97	631
1972	17.5	17.55	1.00	695
1973	18.5	18.26	1.01	841
1974	18.7	18.85	0.99	1011
1975	18.7	18.54	1.01	1113
1976	19.5	18.71	1.04	1229
1977	19.4	19.01	1.02	1333
1978	19.5	19.29	1.01	1495
1979	20	20.36	0.98	1745
1980	20	20.76	0.96	2271
1981	19.6	19.96	0.98	2575
1982	20.3	20.46	0.99	2857
1983	20.2	20.82	0.97	3193
1984	20.3	21.19	0.96	3658
1985	22.3	22.18	1.01	4129
1986	22.3	22.51	0.99	4734
1987	21.5	21.49	1.00	5416
1988	22.3	21.00	1.06	6363
1989	23.5	21.97	1.07	7479
1990	24	22.38	1.07	8430
1991	22.2	22.76	0.98	9451
1992	21.2	21.30	1.00	10 377
1993	21	21.02	1.00	11 623
1994	21.8	21.71	1.00	12 870
1995	21.6	21.56	1.00	14 320
1996	22.4	22.15	1.01	15 782
1997	22.3	21.92	1.02	17 122
1998	23.3	22.91	1.02	18 162
1999	23.4	22.03	1.06	19 493
2000	22	23.19	0.95	21 657
2001	23.4	22.43	1.04	23 481
2002	22.6	24.23	0.93	26 778
2003	21.8	21.77	1.00	28 632
2004	22.3	23.36	0.95	31 370
2005	24.1	24.07	1.00	34 281
2006	25.2	25.03	1.01	37 899
2007	25.5	25.59	1.00	42 863
2008	25.5	24.58	1.04	47 512
2009	23.2	24.67	0.94	49 682
2010	23.3	24.19	0.96	53 823
2011	24	24.73	0.97	58 559
2012	23.9	24.47	0.98	62 297
2013	24.3	24.23	1.00	66 952
2014	24.4	24.09	1.01	71 064
2015	25.6	24.50	1.04	74 663
2016	25.7	25.05	1.03	79 066
2017	25.3	24.68	1.02	83 393
Average	20.77	20.77	1.00	18 776.83

Figure 4. Trends in tax effort for South Africa. Source: Author’s computations.

Agarwal, P, 2018. The Laffer curve. https://www.intelligenteconomist.com/laffer-curve/.

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