Tax effort and capacity in South Africa : a provincial perspective

This paper estimates the tax capacity and tax effort of the nine provinces in South Africa, allowing for the assessment of the revenue-mobilizing ability of provinces and overall tax system efficiency. Provincial tax capacity and effort is estimated via a stochastic frontier approach using the true random effects model. Empirical results produced from this model reveal that per capita gross domestic product, trade openness, income inequality, education, and inflation positively and significantly influence the tax revenue of provinces, while the square of gross domestic product per capita and agriculture have a significant negative tax revenue impact. Tax effort estimates from the model vary between 0.69 and 0.98, suggesting that, while some provinces are close to fully exploiting their potential tax revenue, one or more provinces are significantly underperforming in terms of collecting taxes relative to their potential. On average the tax effort index is 0.95, implying that South African provinces are generally efficient in collecting taxes but there is room for improvement, particularly in certain provinces that are not fully mobilizing their potential tax revenue.