Creating a 2000 IES-LFS Database in Stata

PROVIDE Project Technical Paper 2005:1

SARS (2004) report that in 2001/02 there were 3.5 million registered personal income
taxpayers. Given income levels and the income tax brackets it is fair to assume that the
majority of taxpaying households are in deciles five to ten (6.6 million households). Roughly
40-50% of all households are expected to be taxpaying households.²¹ The IES 1995 data
showed that 49% of households reported zero tax. Despite increases in the number of
taxpayers between 1995 and 2000 the IES 2000 data reports that 77% of households (20,087
out of 26,224) paid no tax at all. If we only focus our attention on deciles five to ten the
number reduces to 62% (9748 out of 15734), which is still considerably higher than our
expected range of 40-50% (see footnote 20).

Two options now exist for adjusting the tax rates. The first is to multiply each household’s
tax expenditure by 1.84, the factor of under-reporting calculated earlier. This will ensure that
the reported tax rate increases, but since the total expenditure also has to be increased at the
same time, the adjusted rate will still be lower than the actual rate. Also, if the tax
expenditure reported by households is simply multiplied by a fixed factor, those households
that initially reported zero tax will still be recorded as paying no tax. A second option is to
estimate the tax rate of households using an econometrically estimated model. Given the
shortcomings of the first option, this approach was taken. The assumption was made that all
households above the median of total expenditure were expected to also report income tax.
For all households falling within this category and reporting zero tax, a tax expenditure value
was imputed. Figure 6 compares this ‘post-adjustment’ tax rate with the ‘pre-adjustment’ and
‘expected’ tax rates (also see Table 6, columns 7 - 9). Section 3.2.7 explains in detail how
the model was estimated.

²¹ According to the LFS 2000:2 about 7831 individuals in the database earned income from salaries and wages
sufficient to be eligible for tax, i.e. they earned more than R22000 (SARS tax tables for 2000/01). These
7831 individuals live in 6258 households, i.e. for every 100 taxable employees, about 80 households are
expected to become taxpaying households. Thus, if the 3.5 million taxpayers all live in deciles five to ten,
we expect about 2.8 million households to be taxpayers out of 6.6 million eligible households. This gives
a rate of about 42%, or, say, 40-50% to allow for some flexibility and to include those households that
pay tax on non-labour income.

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