Tax revenue mobilisation: Improving personal income tax compliance in South Africa

Type Thesis or Dissertation - PhD thesis
Title Tax revenue mobilisation: Improving personal income tax compliance in South Africa
Publication (Day/Month/Year) 2018
South Africa, like any other country, strives towards greater domestic tax revenue mobilisation. As such, a lack of tax compliance is disconcerting, given its implications for the provision of public goods and services. The government has instituted various enforcement measures, such as audits and penalties, and provided reprieves (amnesties and voluntary disclosure programmes) to delinquents who voluntarily disclose their previously unreported income. However, evidence on the efficacy of these measures show mixed responses in developed countries, making it imperative to analyse these policy measures in more depth for developing countries. A further complication is that, even
though there have been continuous efforts to improve compliance, authorities do not have precise knowledge of the scale and scope of non-compliance (i.e. the tax gap). The tax gap is the difference between the potential and the actual tax revenue collected. Against this background, this study used micro-simulation models and household income and expenditure survey data from Statistics South Africa to estimate the size of the country’s Personal Income Tax gap. The findings revealed that South Africa lost significant revenue because of taxpayer non-compliance, particularly from provisional taxpayers. The study also employed controlled laboratory experiments to investigate the behavioural responses of salaried and non-salaried individual taxpayers, in respect to tax audits and penalties. The results confirmed the findings from the tax gap analysis, that taxpayers evade more on their share of nonsalaried income than on salaried income. The results also established that both salaried and nonsalaried taxpayers increased their compliance levels when subjected to higher audit rates or higher penalty rates. However, audit rates had a relatively larger impact, suggesting that the authorities may need to consider increasing the frequency of audits to improve compliance. These findings suggest that, although deterrence measures are effective, the manner in which they are applied must be given careful consideration. The study further examined taxpayers’ behavioural responses to once-off and permanent voluntary
disclosure programmes. A once-off voluntary disclosure programme is a temporary window where delinquents are allowed to report their unpaid taxes at no penalty. In contrast, a permanent voluntary disclosure programme is open-ended (it has no deadline). Using laboratory experiments, the study established that both once-off and permanent voluntary disclosure programmes are effective in increasing compliance in the short-term, and only when they are accompanied by increased enforcement measures. The results also showed that both once-off and permanent voluntary disclosure programmes (with or without increased enforcement) had insignificant long-term effects on compliance. Furthermore, a once-off voluntary disclosure programme was more effective than a permanent voluntary disclosure programme in stimulating compliance. As such, it is recommended that authorities avoid permanent voluntary disclosure programmes.

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