Maximizing Economic Growth in Indonesia: A Model-Based Exploration of Optimal Tax Ratios
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Submitted
10 December 2022
Accepted
16 October 2023
Published
28 June 2024
Keywords:
-
Economic Growth, Tax Ratio, Laffer Curve, GMTR
Abstract
The tax ratio is often used as an indicator to compare tax revenue to gross domestic product (GDP). It offers valuable insights into the overall tax burden on the economy, aiding policymakers and economists in comprehending the extent of taxes in relation to the economic scale. This study examines the tax ratio on economic growth and identifies the ideal tax ratio that could be implemented to achieve optimal economic growth in Indonesia. Applying ordinary least squares (OLS) regression which passes classical hypothesis testing, this study spans a research period of 39 years, covering the years 1983 to 2021. The regression estimation results show that the relationship between the tax ratio and economic growth is non-linear, with a t-statistic value of -2.952949, revealing a high significance level at a probability of 0.0057. Additionally, the t-statistic for the squared tax ratio is 2.540621, demonstrating a significant probability of 0.0158. This empirical evidence suggests that in the early stages, an increase in the tax ratio has a contractionary effect on economic growth., However, if it has reached a certain tax ratio value of 15.29%, a further rise in the tax ratio becomes expansionary, positively influencing economic growth. The tax ratio value of 15.29% is the ideal for creating optimal economic growth in Indonesia. The regression estimation results of this study prove that the government should not be concerned about the increasing of the tax ratio, because it will actually stimulate Indonesia's economic growth. Apart from that, the shape of the Laffer curve, illustrating the relationship between tax revenues and Indonesia's economic growth differs notably from the typical inverted "U" shape. Instead, the Indonesian Laffer curve tends to be flat and curves downwards.
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References
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Badel, A., Huggett, M., & Luo, W. (2020). Taxing top earners: a human capital perspective. The Economic Journal, 130(629), 1200–1225. https://doi.org/10.1093/ej/ueaa021
Baiardi, D., Profeta, P., Puglisi, R., & Scabrosetti, S. (2019). Tax policy and economic growth: does it really matter? International Tax and Public Finance, 26(2), 282–316. https://doi.org/10.1007/s10797-018-9494-3
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Bhattacharyya, C., & Gupta, M. R. (2021). Unionised labour market, environment and endogenous growth. International Review of Economics and Finance, 72, 29–44. https://doi.org/10.1016/j.iref.2020.10.005
Bhimjee, D., & Leão, E. (2020). Public debt, GDP and the sovereign debt Laffer curve: a country-specific analysis for the Euro Area. Journal of International Studies, 13(3), 280–295. https://doi.org/10.14254/2071-8330.2020/13-3/18
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Di Sanzo, S., Bella, M., & Graziano, G. (2017). Tax structure and economic growth: a panel cointegrated VAR analysis. Italian Economic Journal, 3(2), 239–253. https://doi.org/10.1007/s40797-017-0056-0
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Ehrhart, H., Minea, A., & Villieu, P. (2014). Debt, seigniorage, and the growth Laffer curve in developing countries. Journal of Macroeconomics, 07(004), 1–27. https://doi.org/10.1016/j.jmacro.2014.07.004
Feve, P., Matheron, J., & Sahuc, J. G. (2018). The horizontally S-Shaped Laffer curve. Journal of the European Economic Association, 16(3), 857–893. https://doi.org/10.1093/jeea/jvx027
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Gerritsen, A. (2023). Optimal nonlinear taxation: a simpler approach. International Tax and Public Finance, 30(4), 28–52. https://doi.org/10.1007/s10797-023-09779-9
Hermawan, W. (2016). Analisis kebijakan fiskal dan implikasinya kepada perekonomian indonesia: analisis keseimbangan umum. Quantitative Economics Journal, 5(2), 75–88. https://doi.org/10.24114/qej.v5i2.17483
Jaimovich, N., & Rebelo, S. (2017). Nonlinear effects of taxation on growth. Journal of Political Economy, 125(1), 265–291. https://doi.org/10.1086/689607
Kamiguchi, A., & Tamai, T. (2019). Public investment, public debt, and population aging under the golden rule of public finance. Journal of Macroeconomics, 60(January), 110–122. https://doi.org/10.1016/j.jmacro.2019.01.011
Kavese, K., & Phiri, A. (2020). Optimal tax rates in South Africa: new empirical insights to the existing debate. International Journal of Sustainable Economy, 12(1), 44–60. https://doi.org/10.1504/IJSE.2020.107861
Kohn, M. (1997). Macro Economics. South-Western College Publishing.
Laffer, A. B. (1981). Government exactions and revenue deficiencies. Cato Journal, 1(1), 120–139. https://doi.org/10.1007/978-1-349-17563-5_8
Laffer, A. B. (2004). The Laffer curve: past, present, and future. In Executive Summary Backgrounder (1765; June 1).
Liapis, K. J., Politis, E. D., Ntertsou, D., & Thalassinos, E. I. (2020). Investigating the relationship between tax revenues and tax ratios: an empirical research for selected OECD countries. International Journal of Economics and Business Administration, 8(1), 215–229. https://doi.org/10.35808/ijeba/420
Lin, S. A. Y. (1994). Government spending and economic growth. Applied Economics, 26(1), 83–94. https://doi.org/10.1080/00036849400000064
McNabb, K. (2018). Tax structures and economic growth: new evidence from the government revenue dataset. Journal of International Development, 30(2), 173–205. https://doi.org/10.1002/jid.3345
Mensah, Lord, Bokpin, G., & Boachie-Yiadom, E. (2018). External Debts, Institutions and Growth in SSA. Journal of African Business, 19(4), 475–490. https://doi.org/10.1080/15228916.2018.1452466
Milasi, S., & Waldmann, R. J. (2018). Top marginal taxation and economic growth. Applied Economics, 50(19), 2156–2170. https://doi.org/10.1080/00036846.2017.1392001
Miyashita, D. (2023). Public debt and income inequality in an endogenous growth model with elastic labor supply. International Journal of Economic Policy Studies, 17(2), 30–55. https://doi.org/10.1007/s42495-023-00106-y
Mtui, J. M., & Ndanshau, M. O. A. (2020). Fiscal expansion, adjustment and economic growth in Tanzania : 1967-2016. Business Management Review, 23(2), 106–125. https://doi.org/10.2139/ssrn.3637258
Nguyen, Q. H. (2020). Financial deepening in a two-sector endogenous growth model with productivity heterogeneity. The B.E. Journal of Macroeconomics, 20(1), 1–19. https://doi.org/10.1515/bejm-2019-0039
OECD. (2023). Revenue statistics in Asia and the Pacific 2023. In OECD Tax Statistics (database) (Issue 28). https://www.oecd-ilibrary.org/taxation/data/revenue-statistics-in-asia/papua-new-guinea_d2ecd822-en
Peacock, A. T., & Wiseman, J. (1961). The growth of public expenditure in the United Kingdom. In National Bureau Of Economics Research (72; General). Princeton University Press.
Phuong, L. N., Phuong, N. N. T., & Thu, H. D. T. (2022). Determinants of tax revenue: a comparison between Asean-7 plus China and 8-European countries. International Journal of Business and Society, 23(1), 244–259. https://doi.org/10.33736/ijbs.4611.2022
Prettner, K., & Rostam-Afschar, D. (2020). Can taxes raise output and reduce inequality? The case of lobbying. Scottish Journal of Political Economy, 67(5), 455–461. https://doi.org/10.1111/sjpe.12248
Romer, C. D., & Romer, D. H. (2010). The macroeconomic effects of tax changes: estimates based on a new measure of fiscal shocks. American Economic Review, 100(3), 763–801. https://doi.org/10.1257/aer.100.3.763
Romer, P. M. (1990). Human capital and growth: theory and evidence. Carnegie-Rochester Conference Series on Public Policy, 32, 251–286. https://doi.org/10.1016/0167-2231(90)90029-K
Scully, G. W. (1995). The “growth tax” in the United States*. Public Choice, 85, 71–80. https://doi.org/10.1007/BF01047902
Scully, G. W. (1996). Taxation and economic growth in New Zealand. Pacific Economic Review, 1(2), 169–177. https://doi.org/10.1111/j.1468-0106.1996.tb00182.x
Scully, G. W. (2003). Optimal taxation, economic growth and income inequality. Public Choice, 115(3), 299–312. https://doi.org/10.1023/a:1024223916710
Syadullah, M., & Wibowo, T. (2015). Governance and tax revenue in Asean countries. Journal of Social and Development Sciences, 6(2), 76–88. https://doi.org/10.22610/jsds.v6i2.845
Tavani, D., & Zamparelli, L. (2020). Growth, income distribution, and the ‘entrepreneurial state.’ Journal of Evolutionary Economics, 30(1), 117–141. https://doi.org/10.1007/s00191-018-0555-7
Tavor, T., Gonen, L. D., & Spiegel, U. (2019). Reservations on the classical Laffer curve. The Review of Austrian Economics, 34(4), 479–493. https://doi.org/10.1007/s11138-019-00483-8
Wanniski, J. (1978). Taxes, revenues, and the Laffer curve. In The Way the World Works: How Economies Fail, and Succeed (pp. 3–16). Basic Books in the spring.
Wu, H., Gao, K., & Chen, M. (2017). A Study on the optimization of tax structure from the perspective of economic growth. International Journal of Business and Economics Research, 6(5), 93–99. https://doi.org/10.11648/j.ijber.20170605.12
Yossinomita. (2022). Tax policy in limiting the consumption of luxury goods. Review of Economics and Finance, 20(1), 165–171. https://doi.org/10.55365/1923.x2022.20.19
Zhang, L., Chen, Y., & He, Z. (2018). The effect of investment tax incentives: evidence from China’s value-added tax reform. International Tax and Public Finance, 25(4), 913–945. https://doi.org/10.1007/s10797-017-9475-y
Zhang, S., & Huang, Z. (2019). Research on perfecting government non-tax revenue management system. Open Journal of Accounting, 08(03), 35–46. https://doi.org/10.4236/ojacct.2019.83003
Arin, K. P., Berlemann, M., Koray, F., & Kuhlenkasper, T. (2013). Nonlinear growth effects of taxation: a semi-parametric approach using average marginal tax rates. Journal of Applied Econometrics, 28(5), 883–899. https://doi.org/https://doi.org/10.1002/jae.2311
Arvin, M. B., Pradhan, R. P., & Nair, M. S. (2021). Are there links between institutional quality, government expenditure, tax revenue and economic growth? Evidence from low-income and lower middle-income countries. Economic Analysis and Policy, 70, 468–489. https://doi.org/10.1016/j.eap.2021.03.011
Asimakopoulos, S., & Karavias, Y. (2016). The impact of government size on economic growth: a threshold analysis. Economics Letters, 139, 65–68. https://doi.org/10.1016/j.econlet.2015.12.010
Aydin, C., & Esen, O. (2019). Optimal tax revenues and economic growth in transition economies: a threshold regression approach. Global Business and Economics Review, 21(2), 246–265. https://doi.org/10.1504/gber.2019.098091
Badel, A., Huggett, M., & Luo, W. (2020). Taxing top earners: a human capital perspective. The Economic Journal, 130(629), 1200–1225. https://doi.org/10.1093/ej/ueaa021
Baiardi, D., Profeta, P., Puglisi, R., & Scabrosetti, S. (2019). Tax policy and economic growth: does it really matter? International Tax and Public Finance, 26(2), 282–316. https://doi.org/10.1007/s10797-018-9494-3
Barro, R. J. (1990). Government spending in a simple model of endogeneous growth. Journal of Political Economy, 98(5), 103–125. https://doi.org/10.1086/261726
Barro, R. J., & Martin, X. S. (2004). Economic growth. In New York: McGraw Hill (2nd ed.). Massachusetts Institute of Technology.
Bhattacharyya, C., & Gupta, M. R. (2021). Unionised labour market, environment and endogenous growth. International Review of Economics and Finance, 72, 29–44. https://doi.org/10.1016/j.iref.2020.10.005
Bhimjee, D., & Leão, E. (2020). Public debt, GDP and the sovereign debt Laffer curve: a country-specific analysis for the Euro Area. Journal of International Studies, 13(3), 280–295. https://doi.org/10.14254/2071-8330.2020/13-3/18
Chao, J. C. P., & Grubel, H. (1998). Optimal levels of spending and taxation in Canada. In H. Grubel (Ed.), How to Use the Fiscal Surplus (January). Simon Fraser University.
Chao, J. C. P., & Herbert, G. (1998). Optimal Levels of Spending and Taxation in Canada. How to Use the Fiscal Surplus, 53–68.
Chen, S. H. (2019). On economic growth and automatic stabilizers under linearly progressive income taxation. Journal of Macroeconomics, 60, 378–395. https://doi.org/10.1016/j.jmacro.2019.04.005
Christie, T. (2014). The effect of government spending on economic growth: testing the non-linear hypothesis. Bulletin of Economic Research, 66(2), 183–204. https://doi.org/10.1111/j.1467-8586.2012.00438.x
Dai, D. (2018). Fiscal policy under a minimum-time objective. Scottish Journal of Political Economy, 65(3), 293–314. https://doi.org/10.1111/sjpe.12153
Di Sanzo, S., Bella, M., & Graziano, G. (2017). Tax structure and economic growth: a panel cointegrated VAR analysis. Italian Economic Journal, 3(2), 239–253. https://doi.org/10.1007/s40797-017-0056-0
Due, J. F. (1968). Government finance: economics of the public Sector (R. D. Irwin (ed.); p. xiv).
Ehrhart, H., Minea, A., & Villieu, P. (2014). Debt, seigniorage, and the growth Laffer curve in developing countries. Journal of Macroeconomics, 07(004), 1–27. https://doi.org/10.1016/j.jmacro.2014.07.004
Feve, P., Matheron, J., & Sahuc, J. G. (2018). The horizontally S-Shaped Laffer curve. Journal of the European Economic Association, 16(3), 857–893. https://doi.org/10.1093/jeea/jvx027
Fullerton, D. (1980). Can tax revenues go up when tax rates go down? In Office of Tax Analysis (OTA) Paper (41; September). https://doi.org/10.1007/978-1-349-17563-5_9
Gerritsen, A. (2023). Optimal nonlinear taxation: a simpler approach. International Tax and Public Finance, 30(4), 28–52. https://doi.org/10.1007/s10797-023-09779-9
Hermawan, W. (2016). Analisis kebijakan fiskal dan implikasinya kepada perekonomian indonesia: analisis keseimbangan umum. Quantitative Economics Journal, 5(2), 75–88. https://doi.org/10.24114/qej.v5i2.17483
Jaimovich, N., & Rebelo, S. (2017). Nonlinear effects of taxation on growth. Journal of Political Economy, 125(1), 265–291. https://doi.org/10.1086/689607
Kamiguchi, A., & Tamai, T. (2019). Public investment, public debt, and population aging under the golden rule of public finance. Journal of Macroeconomics, 60(January), 110–122. https://doi.org/10.1016/j.jmacro.2019.01.011
Kavese, K., & Phiri, A. (2020). Optimal tax rates in South Africa: new empirical insights to the existing debate. International Journal of Sustainable Economy, 12(1), 44–60. https://doi.org/10.1504/IJSE.2020.107861
Kohn, M. (1997). Macro Economics. South-Western College Publishing.
Laffer, A. B. (1981). Government exactions and revenue deficiencies. Cato Journal, 1(1), 120–139. https://doi.org/10.1007/978-1-349-17563-5_8
Laffer, A. B. (2004). The Laffer curve: past, present, and future. In Executive Summary Backgrounder (1765; June 1).
Liapis, K. J., Politis, E. D., Ntertsou, D., & Thalassinos, E. I. (2020). Investigating the relationship between tax revenues and tax ratios: an empirical research for selected OECD countries. International Journal of Economics and Business Administration, 8(1), 215–229. https://doi.org/10.35808/ijeba/420
Lin, S. A. Y. (1994). Government spending and economic growth. Applied Economics, 26(1), 83–94. https://doi.org/10.1080/00036849400000064
McNabb, K. (2018). Tax structures and economic growth: new evidence from the government revenue dataset. Journal of International Development, 30(2), 173–205. https://doi.org/10.1002/jid.3345
Mensah, Lord, Bokpin, G., & Boachie-Yiadom, E. (2018). External Debts, Institutions and Growth in SSA. Journal of African Business, 19(4), 475–490. https://doi.org/10.1080/15228916.2018.1452466
Milasi, S., & Waldmann, R. J. (2018). Top marginal taxation and economic growth. Applied Economics, 50(19), 2156–2170. https://doi.org/10.1080/00036846.2017.1392001
Miyashita, D. (2023). Public debt and income inequality in an endogenous growth model with elastic labor supply. International Journal of Economic Policy Studies, 17(2), 30–55. https://doi.org/10.1007/s42495-023-00106-y
Mtui, J. M., & Ndanshau, M. O. A. (2020). Fiscal expansion, adjustment and economic growth in Tanzania : 1967-2016. Business Management Review, 23(2), 106–125. https://doi.org/10.2139/ssrn.3637258
Nguyen, Q. H. (2020). Financial deepening in a two-sector endogenous growth model with productivity heterogeneity. The B.E. Journal of Macroeconomics, 20(1), 1–19. https://doi.org/10.1515/bejm-2019-0039
OECD. (2023). Revenue statistics in Asia and the Pacific 2023. In OECD Tax Statistics (database) (Issue 28). https://www.oecd-ilibrary.org/taxation/data/revenue-statistics-in-asia/papua-new-guinea_d2ecd822-en
Peacock, A. T., & Wiseman, J. (1961). The growth of public expenditure in the United Kingdom. In National Bureau Of Economics Research (72; General). Princeton University Press.
Phuong, L. N., Phuong, N. N. T., & Thu, H. D. T. (2022). Determinants of tax revenue: a comparison between Asean-7 plus China and 8-European countries. International Journal of Business and Society, 23(1), 244–259. https://doi.org/10.33736/ijbs.4611.2022
Prettner, K., & Rostam-Afschar, D. (2020). Can taxes raise output and reduce inequality? The case of lobbying. Scottish Journal of Political Economy, 67(5), 455–461. https://doi.org/10.1111/sjpe.12248
Romer, C. D., & Romer, D. H. (2010). The macroeconomic effects of tax changes: estimates based on a new measure of fiscal shocks. American Economic Review, 100(3), 763–801. https://doi.org/10.1257/aer.100.3.763
Romer, P. M. (1990). Human capital and growth: theory and evidence. Carnegie-Rochester Conference Series on Public Policy, 32, 251–286. https://doi.org/10.1016/0167-2231(90)90029-K
Scully, G. W. (1995). The “growth tax” in the United States*. Public Choice, 85, 71–80. https://doi.org/10.1007/BF01047902
Scully, G. W. (1996). Taxation and economic growth in New Zealand. Pacific Economic Review, 1(2), 169–177. https://doi.org/10.1111/j.1468-0106.1996.tb00182.x
Scully, G. W. (2003). Optimal taxation, economic growth and income inequality. Public Choice, 115(3), 299–312. https://doi.org/10.1023/a:1024223916710
Syadullah, M., & Wibowo, T. (2015). Governance and tax revenue in Asean countries. Journal of Social and Development Sciences, 6(2), 76–88. https://doi.org/10.22610/jsds.v6i2.845
Tavani, D., & Zamparelli, L. (2020). Growth, income distribution, and the ‘entrepreneurial state.’ Journal of Evolutionary Economics, 30(1), 117–141. https://doi.org/10.1007/s00191-018-0555-7
Tavor, T., Gonen, L. D., & Spiegel, U. (2019). Reservations on the classical Laffer curve. The Review of Austrian Economics, 34(4), 479–493. https://doi.org/10.1007/s11138-019-00483-8
Wanniski, J. (1978). Taxes, revenues, and the Laffer curve. In The Way the World Works: How Economies Fail, and Succeed (pp. 3–16). Basic Books in the spring.
Wu, H., Gao, K., & Chen, M. (2017). A Study on the optimization of tax structure from the perspective of economic growth. International Journal of Business and Economics Research, 6(5), 93–99. https://doi.org/10.11648/j.ijber.20170605.12
Yossinomita. (2022). Tax policy in limiting the consumption of luxury goods. Review of Economics and Finance, 20(1), 165–171. https://doi.org/10.55365/1923.x2022.20.19
Zhang, L., Chen, Y., & He, Z. (2018). The effect of investment tax incentives: evidence from China’s value-added tax reform. International Tax and Public Finance, 25(4), 913–945. https://doi.org/10.1007/s10797-017-9475-y
Zhang, S., & Huang, Z. (2019). Research on perfecting government non-tax revenue management system. Open Journal of Accounting, 08(03), 35–46. https://doi.org/10.4236/ojacct.2019.83003
Authors
Yossinomita, Y., Haryadi, H., Nainggolan, S., & Zulfanetti, Z. (2024). Maximizing Economic Growth in Indonesia: A Model-Based Exploration of Optimal Tax Ratios. Indonesian Treasury Review: Jurnal Perbendaharaan, Keuangan Negara Dan Kebijakan Publik, 9(2), 87–98. https://doi.org/10.33105/itrev.v9i2.756
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