Defining the tax revenue base for individuals in the South African economy using a micro-simulating tax model

Abstract

The use of micro-simulation tax modelling techniques is reasonably well-documented in a broad spectrum of literature in the field of public economics. This article is primarily concerned with assessing the revenue base for individuals by means of such a micro-simulation tax model, using the 2005/2006 Income and Expenditure survey. The challenge was to structure the model in such a way that differences in individual behaviour, the economic environment and the income levels of individuals be captured to reflect the true national economy. The model developed is an extension of the MS model framework as structured by Thompson and Schoeman (2006) as well as Wilkinson (2009). It is different though in the sense that StatsSa data is aligned with published data from the South African Revenue Services (SARS). Given the scarcity of data (limited surveys) this model is a static model assuming that the population characteristics do not change significantly over the period of the analysis and that it remains useful in the short term. The structured model applies a tax calculator to compute the tax liability for each individual under the 2005/2006 tax regulations and rules. The results based on IES data is then benchmarked against the latest available published SARS data in the bulletin Tax Statistics (2009) and the relevant data in the latest (2010) publication Budget Review from the National Treasury. An analysis based on unadjusted data from the IES shows a substantial difference in tax liability compared to official tax figures published by SARS (R65 billion compared to the SARS figure of R101 billion for the 2005/06 IES survey3 year). After benchmarking critical values and the imputation of missing data the numbers are now much closer (R105 billion compared to the SARS R101 billion). The analysis is concluded with some policy scenarios showing the impact of a change in marginal tax rates and the tax threshold. The results highlight the sensitivity of high income earners to changes in tax policy.