A cge simulation of a flat tax as a possibility for tax reform in South Africa

Abstract

During recent years, there has been widespread interest in South Africa for the so-called “flat tax” systems that appear to have been implemented successfully in Eastern Europe. This paper applied a CGE modelling technique to compare the performance of the South African economy in case alternative tax systems, namely the progressive and the flat tax systems, are applied. The counterfactual situation whose effects are tested in this paper is a 10% decrease in the VAT rate consistent with some popular call for the reduction of the degree of the regressiveness of VAT. The key performances of the South African economy are assessed in terms of economic growth, the welfare of households, equity and employment. On the basis of this empirical investigation the flat tax has a slight edge over the current progressive system.