Tax revenue as an automatic fiscal stabiliser: A South African perspective

Abstract

The many practical economic and political difficulties encountered in discretionary fiscal stabilisation policy highlight the potential benefits of allowing automatic fiscal stabilisers to operate over the cycle. This article investigates the relevance of tax revenue as an automatic fiscal stabiliser in the South African economy by an empirical analysis of its role and impact since the 1970s. The study finds that cyclical changes in tax revenue are relatively small and provide no significant evidence of automatic stabilisation; however, the potential of this tool as an effective automatic fiscal stabiliser in South Africa cannot be overlooked as results show a high correlation between the output gap and automatic stabiliser estimates. Automatic fiscal stabilisers were employed symmetrically over the cycle and results showed that automatic fiscal stabilisers became increasingly important towards the end of the sample period.

Nonlinear Tax Elasticities And Their Implications For The Structural Budget Balance

“…Preliminary analysis, using standard Augmented Dickey Fuller tests, suggests that the tax and tax base variables are I(1), as summarized in Table 1. This paper compares elasticities to that of Du Plessis and Boshoff (2008), Swanepoel and Schoeman (2002) and Jooste (2009). The regression techniques used by these authors are all different.…”

“…These studies focused primarily on linear estimation methods. Swanepoel and Schoeman (2002) estimate constant tax elasticities over the cycle. Their study shows that a one percent widening of the output gap results in a decrease of 0.2 percent in tax revenue.…”

The Benefits of Progressive Taxation in Economic Development

“…Auerbach and Feenberg (2000), for instance, argue that progressive taxation can serve as an automatic stabilizer and that this effect could be as large as traditional demand mechanisms. Swanepoel and Schoeman (2002) find that South Africa's taxation system has played a role as automatic stabilizer as tax revenue and the output gap are highly correlated. By reducing output volatility, income inequality and long-term growth may be positively affected (Ramey and Ramey 1995).…”