065-045 Flat tax reform

Benefits of a flat tax for South Africa
by Antony Last

Introduction

A Google search of “Benefits of a flat tax for South Africa” on 4 September 2016 yielded no results. There were about 508 000 results for Benefits of a flat tax for South Africa (without quotes). Out of the first ten results only one South African (SA) government-associated website in tenth position appears to deal with flat tax: http://www.polity.org.za/article/follow-mauritius-and-russia-and-adopt-a-simple-low-flat-tax-system-for-sa-2014-08-07. As for others of the first ten, sars.gov.za, treasury.go.za, en.wikipedia.org, and kpmg.com entries do not mention flat tax, and only the following others do: moneyweb.co.za, cluteinstitute.com, and economist.com. This provides us with a first impression that the concept of flat tax is not high on the agenda of any SA government authority.

A search on scholar.google.com for “Benefits of a flat tax for South Africa” yielded no results. A search on scholar.google.com for “flat tax” AND “South Africa” yielded about 1,440 results. Of the first 110 entries, 43 articles were selected for review and further investigation based on perceived relevance of the entry to the topic of South Africa and flat tax. This paper is based partially on information from these articles.

Research problem, questions, and hypotheses

The title of this paper “Benefits of a flat tax for South Africa” suggests that, due to the general hype about flat tax worldwide (about 476 000 Google results for “flat tax”), there may be benefits in such a tax or a variable application thereof for SA. Also, the title is synoptic of a research problem which could be worded thus: “The role that flat tax may play in the improvement of living conditions of the people of South Africa.”

The following research questions then suggest themselves:

  1. What results have been experienced from a flat tax in other countries?
  2. Could South Africa economically sustain a flat tax?
  3. What results could be expected from a flat tax in South Africa?
  4. Would a flat tax improve the living conditions of South Africans?

The following hypotheses flow from these questions:

  1. Other countries experience positive effects from a flat tax.
  2. South Africa could sustain a flat tax.
  3. Positive results could be expected from a flat tax in South Africa.
  4. A flat tax could improve the living conditions of South Africans.

We therefore examine the research problem under the following headings:

  1. Effect of flat tax in other countries
  2. South Africa ability to economically sustain a flat tax
  3. Effect of flat tax in South Africa
  4. Influence of a flat tax on South Africans’ living conditions

1. Effect of flat tax in other countries

A Google Scholar search of “flat tax reform” on 3 September 2016 resulted in about 1,230 results. 109 articles were then selected from the first 190 entries displayed. Then all articles with the phrase “flat tax reform” in their titles (for relevance) were identified from the 109, totalling 22. These 22 articles were reviewed as a means of obtaining information on the effect of flat tax in other countries.

Besides Bulgaria, “Other countries that have adopted flat tax rates are Abkhazia, Albania, Anguilla, Belize, Belarus, Bolivia, Bosnia and Herzegovina, East Timor, Estonia, FYROM (Former Yugoslav Republic of Macedonia), Greenland, Grenada, Guernsay, Guyana, Hungary, Jamaica, Jersey, Kyrgyzstan, Kuwait, Kazakhstan, Latvia, Lithuania, Madagaskar, Mauritus, Mongolia, Nagorno-Karabakh, Poland, Romania, Russia, Saint Helena, Saudi Arabia, Serbia, Seychelles, South Osetia, Transnistria, Trinidad and Tobago, Turkmenistan, Tuvalu, Ukraine” (Vasilev, 2015).

“Devereux and Lowe (1994) obtain a welfare gain of 5%,
Azacis and Gillman (2010) find similar welfare gains 2.2 − 3%
for the case of the flat tax reform in the Baltic countries
during 2000-07. Using a large-scale life-cycle model, Altig et al. (2001) also
find significant gains from a flat income taxation in the US” (Vasilev, 2015).

“Using a calibrated micro-founded endogenous growth model
with physical and human capital accumulation to Bulgarian
data, a computational experiment is performed to quantify
the dynamic welfare effect of progressive income taxation
vis-a-vis flat income taxation. The model demonstrates that significant welfare gains,
measured in terms of per-period consumption, can be realized
with the introduction of flat income taxation” (Vasilev, 2015).

“Tax reforms can be seen as one of important aspects of free-market structural reforms needed for sound public finances and open investment climate. Estonian and Slovak cases show that the introduction of the flat tax, in combination with other structural liberalisation reforms, has increased opportunities for economic growth, due to dynamic economic effects. Flat tax policies have already been enacted in majority of Eastern European countries. In the meantime, Hungary and Poland have flat tax policy plans, which gives a significant signal that almost the whole Eastern European area shall have flat tax systems soon, with even stronger challenges for Western European countries.
Flat tax reforms aim to create more simple, fair and neutral tax systems, through a single tax rate on personal and/or corporate income and/or VAT, and broadening the tax base through abolishment of all exemptions, except personal allowance. Countries aim to achieve higher tax revenues and economic growth through increased investment incentives in their fiscal policies” (Hinšt, 2010).

References

Hinšt, D. A. N. I. E. L. (2010). Flat Tax Reforms in Estonia and Slovakia as Perspectives for Croatian Tax Reform. Retrieved on 4 September 2016 from http://files.lrinka.lt/analitiniai%20darbai/Flat%20Tax%20Reforms%20in%20Estonia%20and%20Slovakia%20as%20Perspectives%20for%20Croatian%20Tax%20Reform.pdf

Vasilev, A. (2015). Welfare Effect of Flat Income Tax Reform: The Case of Bulgaria. Eastern European Economics, 53(3), 205-220. Retrieved on 4 September 2016 from http://www.bma-bg.org/assets/var/docs/pres_flat_tax_BG_Vasilev.pdf