The relationship between tax structure and economic growth :: The case of Indonesia
AJI, Cahya Dewa, Prof. Masaru Ichihashi
2009 | Tesis | S2 Magister Ekonomika Pembangunanunavailable in fulltext
Many studies have been conducted in order to find the relationship between taxation and economic growth. However, many economists yield different results in their studies. On the one hand, some believe that taxation has a negative link to economic growth as the theory suggests. Taxes may distort the economy and reduce investment which affects the accumulation of physical and human capital which are the source engines of economic growth. On the other hand, others believe that taxation may have a positive connection to economic growth. The key assumption of this theory is that role of government in providing public goods financed by taxation can serve as one of the production factors. The main objective of this study is to establish the connection between the Indonesian tax structure and its economic performance, which is reflected by economic indicators such as economic growth. Most of the previous studies examine the link between taxation as a whole and economic growth. However, this study tries to utilize tax structure rather than tax as a whole to know further which types of tax affect economic growth. The first method is tax elasticity and tax buoyancy analysis. Those analyses are very useful in the selection process of which type of tax might raise more revenue. The findings for tax elasticity and buoyancy analysis are as follows: In the post-tax reform period (1971-1983), total tax elasticity is 2.95, which is relatively higher than total tax elasticity in the pre-tax reform period (1984-2007). For the whole period (1971-2007), total elasticity is 2.46 in which Income Tax and VAT elasticity have the highest share among the other types of tax. In pre tax reform (1971-1983), Property Tax has the highest tax buoyancy compared to other types of tax in the Indonesia tax structure with the value 2.71. Afterward, Income Tax and Excise Tax follows with the tax buoyancy value of 1.73 and 1.58, respectively. On the other hand, in the post-tax reform period (1984-2007), the highest tax buoyancy is Income Tax. The buoyancy coefficient for Income Tax is 2.41 subsequently followed by Property Tax and VAT with the value 2.31 and 2.15, respectively. The possible explanation for this fact is that tax structure after the tax reform with lower tax rates, a broader tax base and administrative simplicity is relatively successful in raising the level of tax buoyancy. Another method to test the effect of taxation is using Input-Output approach to run a simulation model. There are two scenarios in this approach. The first scenario is the simulation using Input-Output analysis under a condition without any shocks or changes within the economy. The second scenario for this method is to compare the results under the condition after a shock has been applied within the economy. In this scenario, a change in tax rate is applied as a shock for the final demand since Indonesian government issued the new Income Tax Law No.36/2008 with a new single tax rate for corporate tax of 28% and where the top tax rate for personal income tax decreases from 35% to 30%. This simulation uses Indonesian Input-Output table for 2005 aggregated into 39 sectors and tax revenue for 2005 by sector. Both scenarios will utilize the self-sufficient Leontief inverse matrix in calculating the induced effect of final demand on intermediate output. The simulation of scenario 1 generates an induced effect of as much as 331.1 trillion rupiah. In addition, the induced effect of scenario 2 on intermediate output is 330.6 trillion rupiah. The comparison of those two scenarios shows that the induced effect of scenario 1 is to some extent greater than that of scenario 2. This may be interpreted as indicating that decreasing government expenditure, which is assumed to be financed by tax revenue, has a propensity to decrease the economy performance. Furthermore, government spending has greater induced effect than investment.
Kata Kunci : Economic growth,Indonesia
