FINDING THE OPTIMAL TAX RATIO IN INDONESIA: A BALANCED BUDGET APPROACH

• Main Authors: , Agus Syamali, S.S.T., , Prof. Ichihashi Masaru
• Format: Theses and Dissertations NonPeerReviewed
• Published: [Yogyakarta] : Universitas Gadjah Mada 2011
• Subjects: ETD
• Online Access: https://repository.ugm.ac.id/90375/; http://etd.ugm.ac.id/index.php?mod=penelitian_detail&sub=PenelitianDetail&act=view&typ=html&buku_id=53315
• Institution: Universitas Gadjah Mada

The main role of taxation is to raise revenue to finance government expenditure. There are three basic purposes of taxation in developing countries. The most important is to mobilize resources to finance public expenditure, for instance public health program, education, transportation, communications and infrastructures. Second, tax incentives are considered a tools to attract private investment. The third purpose of taxation is to redistribute income. As in other countries, Indonesia also relies on tax revenues as primary sources of government funding. The biggest part of government revenues comes from taxation. This source of income was 70 percent of the budget in 1970, decreasing to 26.33 percent in 1981, and then increasing to 73.04 percent in 2009. Since tax reform was enacted in 1983, Indonesia has a good tax system however its tax ratio is low. The average tax ratio for Asia and the Pacific is around 15 � 20 percent, while Indonesia is only 11.9 percent. By this measure, Indonesia should increase its tax ratio to collect more revenue and ensure its fiscal sustainability. But if the government imposes an excessive tax rate, it may have negative repercussions on the economic activity. Thus, it is important to determine the optimal tax ratio for Indonesia. Many studies have been conducted to find the relationship between taxes and economic growth. However, economists have different opinions and study results. Some find no relation between taxes and economic growth. On the other hand most of researchers find a negative correlation between fiscal policy and economic growth. This study attempts to estimate the optimal tax ratio to maximize economic growth and government revenue in Indonesia, using a balanced budget approach. A Cobb-Douglass production function, with two sectors, public sector (government) and private sector (nongovernment) is employed. The rate of economic growth is determined by the government sector (G) which provides goods produced with capital and labor, and financed using revenue from taxation (�.GDP), and non-government sector, that is ((1- �)GDP). Under balanced budget, (G) is equal to tax (�.GDP). This analysis indicates an optimal tax ratio to supports economic growth in Indonesia is 15.85 percent, while the tax ratio that maximizes tax revenue is 57.92 percent. It is still higher if we compare the actual tax ratio in Indonesia. From 1970 to 2009, the Indonesian tax ratio never reached 15 percent. The highest tax ratio was 13.03 percent, achieved in 2008. From the perspective of tax structure the highest tax rate in Indonesia was 35 percent. This result indicates that Indonesia has the opportunity to increase tax revenue and the tax ratio. This can be achieved without increasing existing tax rates, but by increasing the efficiency of tax administration and increasing tax subject. The data confirm that the ratio of total personal taxpayers to total population is only 2.2 percent, and from this amount, the filing ratio is only 28 percent of total registered taxpayers or 0.6 percent of the total population. Furthermore, since the tax ratio (�) is still below its optimal level, the positive effects government expenditure to economic growth are still higher than the negative effect of taxation on economic growth. Increasing government expenditure is important to support the growth process. However, government should be selective in determining the types of spending. Productive expenditures such as infrastructure, public health and education should get more attention, while the growth of government offices and personnel costs should be controlled and reduced.