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The Elasticity of Taxable Income: The Case of South Africa

A key tax policy parameter that has received much attention in the international literature, but about which there is substantial uncertainty, is the overall elasticity of taxable income. The size of this parameter is central to the formulation of tax and transfer policy, as well as for the study of the welfare implications of tax decisions. This paper by Harri Kemp uses a panel of individual tax returns for the period 2009–2013 and the phenomenon of “bracket creep” to construct instrumental variable estimates of the sensitivity of income to changes in tax rates.

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After improving in 2019Q3, construction activity gained further ground in 2019Q4. The higher activity lifted the FNB/BER Civil Confidence Index to 22, from 15 in 2019Q3. This marks the first time since 2017Q2 that confidence has been above 20.

The seasonally adjusted Absa Purchasing Managers’ Index (PMI) edged lower to 47.1 index points in December 2019 from 47.7 points recorded in November. The December figure is about one point below the average recorded through 2019. In any case, the PMI paints a bleak picture of the performance of the manufacturing sector through the year as the headline PMI only managed to edge above 50 points for two months in the year. Bouts of load shedding and persistent weak domestic demand coupled with more intense headwinds from the global economy likely weighed on activity during the year.

After dropping from 28 in the second quarter to a 20-year low of 21 in the third quarter, the RMB/BER BCI rose to 26 in the fourth quarter. Confidence rebounded in three of the five sectors making up the BCI namely the building, manufacturing and retail trade. It declined in the new motor trade and remained essentially unchanged in the wholesale trade sector. Though the fourth quarter rebound in the RMB/BER BCI is encouraging, some realism is necessary: the improvement was a mere five index points and was not broadly-based across sectors. Moreover, at 26, the BCI remained deep in net negative terrain, with a strong majority of respondents still expressing a sense of pessimism.

The FNB/BER Consumer Confidence Index (CCI) stayed unchanged during the fourth quarter of 2019. At -7 index points, consumer confidence remained at its lowest level since the fourth quarter of 2017 (-8). The confidence gains since Mr. Ramaphosa's election have now been completely reversed and South Africa's grim economic reality has become apparent to consumers. (The fieldwork for the fourth quarter CCI was completed before the implementation of stage 6 load shedding in December.)