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The Tax System and Economic Growth: 2005/2006 Budget Hearing

Explore the impact of tax policies on economic growth based on Prof. SF Koch Harberger's Superneutrality Conjecture. Analyze case studies from developed and developing economies and draw conclusions for South Africa. Assess the macro forecast and budget proposals for driving further growth.

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The Tax System and Economic Growth: 2005/2006 Budget Hearing

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  1. The Tax System and Economic Growth: 2005/2006 Budget Hearing Prof SF Koch

  2. Harberger’s Superneutrality Conjecture …this boils down to the question of how significantly the rate of growth could be influenced by plausible changes in the mix of direct and indirect taxation. I think that answer is not very much. • Harberger (1964) – the mix of taxes alters labor supply and investments rates insignificantly.

  3. General Developed Economy Conclusion Engen and Skinner (1996) • 5% reduction in all taxes  0.25% per year growth increase. • Over 36 years, US GDP would have been 7.5% higher than it was at the time.

  4. Developing Economies: Asia and Africa • Asia • Marsden (1990) – high tax group averaged 1.1% growth, low tax group averaged 7.3% growth. • Kerr and McDonald (1999) – little evidence of tax structure effect. • Africa • Skinner (1987) – Personal and corporate income taxes significantly and negatively affect economic growth, but sales and excise taxes have little influence. • Koch, Schoeman, van Tonder (2004) – Higher taxes associated with lower rates of growth.

  5. South Africa Historical Perspective

  6. The picture in a nutshell • Larger tax burdens are associated with lower GDP growth rates. • Estimates from some of our research suggests the relationship could be as high as 1 to 1. • In other words, for each 1% increase in the tax burden, economic growth in South Africa is 1% lower. • That is probably due to other problems that are synonymous with high taxes: regulation, large public enterprise sector, crime, and large economic disparities.

  7. Private Saving, Public Saving

  8. What we have seen so far… • Measured tax burden has risen • SARS has improved collections • Government Savings did improve • GDP Growth Rates have been trending downwards • Small increases in Household Savings • Larger increases in Corporate Savings • Offsetting recent decreases in Public Savings • Where is the investment?

  9. What can we expect ???

  10. South AfricaMacro Forecast

  11. South AfricaBudget Forecast

  12. What can we expect? • Level, but consistent GDP growth near 4% per year • No expected recessionary effects • Energy costs • Level, but consistent Inflation near 5% per year • International shocks – Yuan devluation? • Domestic Pressure – Expensive capital • Higher budget deficits, up to 4% of GDP • Capital budget • Structural deficit • Borrowing cheaply

  13. Main Tax Proposals to Drive Further Growth • Savings Promotion • Interest and dividend exemptions • Reductions in Personal and Corporate Rates • Recovering from tax bracket ‘inflation’ – 1% to 35% reductions • 1% corporate rate reduction • Simplifications and Incentives for SMMEs • Accelerated depreciation allowances • Graduated tax structure. • Expected improvements in SARS collections

  14. Main Expenditure Proposals to Drive Growth • Infrastructure Expenditure • Municipal Infrastructure Grants • Provincial Infrastructure Grants • Roads and Passenger Rail Infrastructure • Water Resources • Public Enterprise Capital Investment • Transnet – ports, freight, and pipelines • Eskom – generation, transmission, and distribution

  15. Expenditure for 2005/2006:Increases over 2004/2005

  16. Infrastructure Expenditure Plans

  17. Infrastructure Backlogs

  18. Things to Consider in South Africa • Inefficient Public Good Provision: • Increased public infrastructure spending was correlated with reduced growth in Africa from 1974 to 1982. • Current Municipalities and Provinces lack the capacity to spend additional allocations. • Perverse Incentives: • Companies burdened with non-financial goals as well as taxation. • Expensive Regulation: • Takes nearly two years to form a company in South Africa. • Difficult to hire and fire Workers.

  19. If we add it all up, proposed fiscal policy is not likely to alter the end of this picture…

  20. …Therefore • The result of the tax side is positive: • Lower taxes ALWAYS make people feel better • Good for the economy – possibly raise growth rates in excess of 1% (better than forecast by Treasury) • The result of expenditure policy is less conclusive • Additional public expenditure in areas where it cannot be absorbed is merely wasteful. • Capital Expenditure by Public companies may merely displace capital expenditure by private companies. • Should be some improvements in equity.

  21. Conclusion • Good Fiscal Policy • Will keep the economy on a steady track • Will redistribute income according to need • Does signal strong economic conditions, and • May lift the ‘animal spirits’ within the economy • …but • Cannot rectify regulatory burdens in the economy • Cannot counteract regulatory costs to companies, and • Cannot turn South Africa into an African ‘Lion’ as compared to an Asian ‘Tiger’.

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