Page 5 - Working Paper (Tax Policy Options during Economic Downturn)

DDTC Working Paper 1315
5

especially in the emerging economies surge The Government of Indonesia usually tries
as a response of higher short-term interest to alleviate the downturn by increasing
rate. Although capital inflows increased government expenditures (i.e. better
substantially and more permanently budget absorption, social program, reduce
in Indonesia after GFC, tight monetary subsidies, etc.) and providing tax incentives
policy during this time of the year will not strategies. During GFC, almost 60 percent
necessarily be the same results due to of the Indonesian fiscal stimulus package
different global economic conditions where was allocated to income tax cuts. Indonesia
US economy is much better than 7 years ago Ministry of Finance cut personal income tax
and commodity prices remain weak hurting from 35 percent to 30 percent and corporate
countries’ exports. income tax from 30 to 20 percent. Futher,
economists call this government action
Global Financial Crisis (GFC), occurred as a counter-cyclical policies. Keynesian
in 2008 due to subprime mortgage crisis stream economics argues that increasing
originated in the United States of America. government expenditure with constant or
The country experienced a sharp decrease decreasing tax rates will stimulate aggregate
in growth from 2.1 percent in 2007 to 0.4 demand.
percent (2008) and contracted to minus 2.4
percent in 2009. World economic growth Basri and Raharja (2011) suggested
slides from 5.2 percent in 2007 to minus that fiscal stimulus through tax cuts can be
0.6 percent in 2009. Following the global relatively more effective in Indonesia for
contraction and tight liquidity in the global three reasons: (i) Indonesian households
market, global trade volume also abated. consume more and saving less – higher
When the global trade volume decreased, marginal propensity to consume; (ii)
exports from all countries slowed. As a spending behaviour is likely to be influenced
result, emerging markets and developing by current income, rather than permanent
economies also experienced a significant income; (iii) higher consumptions supported
3
decrease, including Indonesia . Unlike the by large working age populations.
US and developed countries, growth in 2.2 Tax and Economic Growth
emerging market economies fell, but still
within positive level from 6.1 percent in
There were, previously, studies that
4
2008 to 2.4 percent 2009 .
identified the link between tax collections
Although the effect of GFC to the global and economic growth. Results of the studies
economy, Indonesia still maintained its were varied where some researchers, such
7
growth by 4.5 percent (2009) and became as Agell, Lindh and Ohlsson ; and Easterly
8
the third fastest growing G-20 after China and Robelo found weak relationship
and India. During that period, Indonesia between the two variables. However, other
10
9
economy was also supported from resilience papers done by Skinner ; Arnold et al ;
11
5
domestic demand . Economic growth in and Gemmel, Kneller, and Sanz showed
Indonesia was particularly depending on that there was a robust and significant
household and government consumption. relationship between taxes and growth.
Therefore, policies to foster household Skinner found that increase of personal
consumption and government expenditure income and corporate tax rates had a
become important to bolster the economy negative impact on economic growth;
growth especially during the economic
downturn. Aaron et al (2004) indicate that for the USAIS mission, Jakarta.
7. Agell, J., T. Lindh, and H. Ohsson (1997),” Growth and the Public
the government consumption can create
Sector: A Critical Review Essay”, European Journal of Political Economy.
job opportunities amounting to as much 13 (1). Pp. 33-52.
6
as 19 percent of total job opportunities . 8. Easterly, W. And S. Rebelo (1993),” Fiscal Policy and Economic
Growth: An Empirical Investigation”, NBER Working Paper NO. 4499.
Cambridge, MA: National Bureau of Economic Research.
3. Basri, M.C and Rahardja, S (2011),”Mild Crisis, Half Hearted Fiscal 9. Skinner, J. (1987),” Taxation and Output Growth: Evidence from
Stimulus: Indonesia During the GFC”, in Ito, T. And F. Parulian (eds), African Countries”, NBER Working Paper Series NO. 2335. Cambridge,
Assessment on the Impact of Stimulus, Fiscal Transparancy and Fiscal MA: National Burau of Economic Research.
Risk, ERIA Research Project Report 2010-01, pp. 169-2011, ERIA.
10. Arnold, J. M., B. Brys, C. Heady, A. Johansson, C. Schwellnus, and
4. IMF (2010),”Wold Economic Outlook, October 2010”. L. Vartia (2011),”Tax Policy for Economic Recovery and Growth”, The
5. The share of total indonesian exports of goods and services in national Economic Journal. 121 (February). pp. F59–F80.
account as a percentage of GDP was 29 percent. This is much lower than 11. Gemmell, N. and J. Au. 2012. Government Size, Fiscal Policy and
Singapore (234 percent), Taiwan (74 percent) or Korea (45 percent). the Level and Growth of Output: A
6. Aaron, Carl, Lloyd Kenward, Kelly Bird, Mihir Desai, Haryo Review of Recent Evidence. Working Paper in Public Finance 10/12.
Aswicahyono, M. Chatib Basri, Tubagus Choesni (2004),”Strategic Wellington: Victoria
Approach to Job Creation and Employment in Indonesia”, paper prepared Business School.