The effects Personal of Income Tax on the savings behaviour of households in South Africa

Abstract

The "new" South Africa faces a big challenge. Unemployment, poverty and economic hardship still characterise the life of the majority of South Africans. Most people expect this to change under democracy. This will only be possible, however, if the economy can grow fast enough. What type of economic policies can a future government adopt to bring about economic growth and the reduction of poverty? More specifically, can the government raise taxes in order to spend more on the poor without reducing economic growth? The increased expenditure, given the existing deficit, will pressurise government to increase taxes. If this were to happen, the question that comes to mind is whether a savings constraint will develop. At the moment South Africa is not experiencing a savings constraint. This can be attributed to the fact that investment declined more than saving over the past few years. However, if investment has to increase over the next few years to achieve higher economic growth, the question arises whether domestic saving will increase enough to finance it. This will be difficult if an increasing tax burden has a negative impact on saving. Saving has long been recognized as a major factor in the process of economic development, directly by its diversion of resources into the formation of capital, and indirectly through changes in technology which are implemented when new capital is put to use. Few would dispute that domestic saving is important for the financing of development and it is evident that a country will require higher saving rates if it wants to invest more.