Chapter 14

Taxes on good and services and tax reform

Learning outcomes

• Distinguish between different indirect taxes and indicate their relative

• Importance as sources of revenue• Discuss the merits of indirect taxation• Describe the consumption type VAT• Explain the economic effects of VAT• Describe the personal consumption tax base• Discuss the rationale for a personal consumption tax.

Learning outcomes (continued)

• Discuss the shortcomings of a personal consumption tax

• Distinguish between patterns of taxation in industrialised countries and developing countries

• Identify the direction of international tax reform• Compare tax competition with tax harmonisation• Contrast international tax reforms with the major tax

reforms in South Africa since the late 1960s.

Types of indirect taxes

• Single-stage commodity tax• Multi-stage commodity tax• Excise duties• Customs duties• Sumptuary taxes.

Indirect taxes are taxes that are imposed on commodities or market transactions.

Assessment of indirect taxes

Advantages

• Practical• “Invisible”• Choice/ability to determine

tax liability• Achievement of multiple

objectives• Indexed for inflation• Simple administration.

Disadvantages

• Regressive• Inefficiencies• Policy conflict• Inflationary effect.

Value added tax

• GNP = C + I = W + P + D• C = W + P + D – I• Restricted-origin principle• Single vs multiple rates• Economic effects

– Revenue– Efficiency and the tax rate– Equity– Administration.

Value added tax is a multi-stage sales tax levied on the value added at the different stages of production.

Personal consumption tax

Advantages

• Equitable• Efficient• Return to work effort• Beneficial to developing

countries.

Disadvantages

• Lack of success elsewhere• Risks• Administration• Ability to distinguish

between consumption & investment

• Treatment of bequests and gifts

• Transition.

Tax reform

• Patterns in industrialised and developing countries– Predominant sources of revenue– Importance of tax on individuals vs companies– Insignificance of payroll, workforce and property taxes– Dependence on general sales tax/VAT– Significance of trade taxes

• International tax reform– Base broadening.

Globalisation

• Cross-border shopping• Transfer pricing• Tax evasion and avoidance• Pressure to lower taxation levels.

Economic globalisation may be defined as the integration of economies throughout the world through trade, financial flows, the

exchange of technology and information, and the movement of people .

(Ouattara)

Efficiency gain from harmonising tax rates

Tax reforms in South Africa

• Independent revenue authority• Tax amnesty• Single rate structure• VAT for gambling and fee-based financial services• Tax on interest, rental and other trading income

introduced and abolished• Introduction of capital gains tax• Residence-based income tax• Lowering of company tax rate for small businesses.

Tax reforms in South Africa (continued)• Tax incentives to promote direct investment• Secondary tax on companies replaced with dividend

tax• Abolishment of RSC and JSB levies• Environmental charges and incentives• National health insurance (NHI) to be phased in.

Thank you.