Impact of reduction in corporate income tax on the South African economy: A CGE analysis

Abstract

Abstract. The aim of this study is to evaluate the effects of the drop in the Corporate Income Tax (CIT) from the current rate of 28% to 27% on the South African economy. The CGE model is considered appropriate to perform this research paper. This model is considered as the suitable model to evaluate the effects of change in CIT due to its usage over the years by the researchers and academics. One simulation is taken into consideration to evaluate the effects of the reduction in the CIT. The macroeconomic and investment closures were considered to observe the effects of the shock within the economy. In the closure, capital stock is allowed to change. Apart from the capital stock, the unskilled labour force is also allowed to change. The setting up of the CIT to 1% reduction results in a slight increase in the GDP, consumption, export and government revenue. Due to the fact that tax collection depends on the type of policy, economy and compliance revenue accomplishment, it was anticipated that private consumption should heighten as the CIT drop by 1%. In this respect, the improvement in the economy-wide productivity indicates that output has a significant impact on employment. The GDP increases slightly by 0.02164% which point out that the expansionary economy coupled with augmented export demand raises the demand for factors of production. CIT and tax assessment data constitutes the originality of this study, as acquiring reliable data on the CIT continues to be a non-trivial task in South Africa.

Keywords. Corporate income tax (CIT); South African Revenue Service (SARS), CGE model.

JEL. D58; H25.