Taxes in OG-ZAF

The government is not an optimizing agent in OG-ZAF. The government levies taxes on household income, corporate income, and value added. With these resources, the government provides transfers to households, spends resources on public goods, and makes rule-based adjustments to stabilize the economy in the long-run. The government can run budget deficits or surpluses in a given year and must, therefore, be able to accumulate debt or savings. The spending and debt parameters are discussed in Chapter Calibration of Macroeconomic Parameters. Taxes are discussed in this chapter.

Personal income taxes

The government sector influences households through two terms in the household budget constraint (14)—government transfers \(TR_{t}\) and through the total tax liability function \(T_{s,t}\), which can be decomposed into the effective tax rate times total income. In this chapter, we detail the household tax component of government activity \(T_{s,t}\) in OG-ZAF.

(14)\[\begin{split} c_{j,s,t} + b_{j,s+1,t+1} &= (1 + r_{hh,t})b_{j,s,t} + w_t e_{j,s} n_{j,s,t} + \\ &\quad\quad\zeta_{j,s}\frac{BQ_t}{\lambda_j\omega_{s,t}} + \eta_{j,s,t}\frac{TR_{t}}{\lambda_j\omega_{s,t}} + ubi_{j,s,t} - T_{s,t} \\ &\quad\forall j,t\quad\text{and}\quad s\geq E+1 \quad\text{where}\quad b_{j,E+1,t}=0\quad\forall j,t\end{split}\]

The total tax function, \(T_{s,t}\), is a function of personal income taxes, taxes on bequests, and wealth taxes. In the default calibration, wealth and bequest taxes are set to zero in OG-ZAF. Personal income taxes are modeled as linear taxes and set to average effective and marginal tax rates. The OG-Core documentation details more detailed ways to match the progressivity of the tax system. But given limited data for South Africa, we start with simple linear tax rates of 22% for effective tax rates on personal income, a 25% marginal tax rate on capital income, and a 31% marginal tax rate on labor income.

Corporate income taxes

OG-ZAF uses the top statutory rate of 27% for the corporate income tax rate.

Value-added taxes

A value-added tax rate of 15% is applied with the tau_c parameter.