| dc.description.abstract | Purpose – The Government of Namibia has traditionally used fiscal (especially tax) policy as an instrument for annual budget formulation. Marginal tax rates for profits and various income brackets have been changed back and forth in response to changes in economic conditions. However, to date, no attempt has been made to evaluate the effectiveness of these reforms in achieving the broad national economic goals, in general, and the potential effects on government revenue in the short, medium and long-run periods, in particular. The purpose of this paper is to fill this information gap by analysing the implicationof the 2008 zero-rating of value added tax (VAT) on basic commodities for aggregate demand and government revenue.
Design/methodology/approach – The study uses an analytical framework based on economic
theory which posits that in an open economy, which trades with the rest of the world, aggregate demand for goods and services is made up of consumption demand, investment demand,
government demand and net exports and that real sector equilibrium is attained when aggregate
supply of goods and services is equal to aggregate demand for goods and services.
Findings – Using the Namibia Household Income and Expenditure Survey results, the annual loss
in government revenue attributable to this policy is,ceteris paribus, estimated to be N$310.4 million.
With a marginal propensity to consume out of disposable income of 0.89, total expenditure
by households on goods and services is likely to increase by N$276.3 million per annum. In the
medium-to-long-run, national income will have increased by N$303.9 million per annum.
Taxes which are responsive to changes in the level of national income will have increased by
N$85.7 million, compensating for just over one quarter of the estimated loss in government revenue
of N$310.4 million.
Research limitations/implications – The study has used a partial equilibrium model as
opposed to computable general equilibrium model, which provides a consistent framework that
meets most of the sectoral and institutional data requirements for the simple reason that a social
accounting matrix which can be used readily to connect data from different sources, such as national accounts and household surveys and would thus have been ideal model for analysing the impacts of the VAT tax reform has not been developed for Namibia.
Practical implications – The paper provides a number of practical policy options available for
government including, but not limited to, increasing direct taxes, VAT rate on specific (luxury)
goods and services and statutory VAT rate on all other commodities not zero-rated, other taxes such as taxes; and borrowing from external sources.
Social implications – It is established that zero-rating VAT on all the basic commodities in
2008 reduces the VAT paid by all Namibian households by N$310.4 million per year, which
represents the annual increase in the disposable income of all households. And with a marginal
propensity to consume out of disposable income of 0.89, total expenditure by households on goods
and services will increase by N$276.3 million per year. | en_US |
