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

DDTC Working Paper 1315

                         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
                         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
                         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
                         growth by 4.5 percent (2009) and became          as  Agell,  Lindh  and  Ohlsson ;  and  Easterly
                         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
                         economy was also supported from resilience       papers  done  by  Skinner ;  Arnold  et  al ;
                         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.
                         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.
   1   2   3   4   5   6   7   8   9   10