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

Abstract

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.