South Africa, as well as many other African countries, require additional domestic tax revenues for sustained development and face a number of political tax revenue and economic tax revenue challenges in obtaining these revenues. Changes to tax policy should take into account the requirement for additional revenue and the challenges faced and also be well-motivated and theory based. To this end, South African policy makers could well consider policy changes to the Value-Added Tax (VAT).
In this interdisciplinary study of law and economics, the structure of a good VAT, based upon theory and studies by experts, was recapitulated. The extent that the South African VAT aligns with this structure was then determined. Based thereon, a number of well-motivated and theory based tax policy changes were identified. To provide empirical evidence of the additional tax revenue and the impact of these policy changes upon households, a structural model of the South African VAT was developed.
In developing the structural model, a complete demand system and a food demand system were estimated for 24 752 South African households. From these estimations, unique demand equations for each household were determined, allowing for households consumption behaviour to change in response to a change in VAT policy and direct cash expenditure policy. The identified policy changes were applied to the structural model, the results were described and policy recommendations were made.