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DDTC Working Paper 1416

                   concave , the country is still  relatively on the   into a simplistic framework – built by assumptions
                   beginning of the curve, where the marginal value   – in which one tries to extract principle, or concept,
                   of public good is high.                          to comprehend the way the reality works. It means
                                                                    that  sometimes, if one does  not use appropriate
                      Third, regarding optimal  corporate income    assumption, the concluded idea will certainly not
                   tax  policy, I limit the scope  to certain extent. By   work in reality. The same also happens if the theory
                   using  the term  ‘optimal’,  I  refer to the link  with   is directly used to different  countries, where the
                   the welfare of  consumers,  which  are assumed  as   economic context is totally different.
                   economic individuals who maximize utility through
                   consumption. By using the term ‘corporate income    This is what I intend to do, which is to develop
                   tax policy’, I limit to the example of corporate tax   the existing  theory,  constructed by mathematical
                   rate and the regime of the tax system, consisting   work, with a more adjusted assumptions which are
                   to two form:  source principle  and residence    more relevant to developing countries, especially
                   principle. More importantly, the governments here   Indonesia. With such assumptions, the findings can
                   is perceived as benevolent  in a  way that  under   also be useful for other countries who are framed
                   international tax competition, they seek optimal   with the same characteristics. Such works purposed
                   policy  to maximize the country’s  welfare, which   to developing countries is relatively limited, with
                   is not only maximized by public goods provision –   most of them are conducted with assuming that the
                   which is funded by tax –, but also by private goods   countries involved has economic attribute that are
                   consumption. 11                                  only belong to developed countries.

                      In  this  paper,  rather than  to absorb  the    The theoretical side of international tax is not
                   knowledge from empirical data, I try to generate   purposed  to provide  accurately the magnitude
                   the understanding  by deriving mathematical      of  determinants  in  influencing  the  optimal
                   equation.  In  such a  way, the model represents   policy decision.   Rather,  it  constructs  the  logical
                   rational behavior of economic actors – government   framework  that  explains  the kind of forces that
                   and  firms  –  in  maximizing  their  utilization.  This   lead to the desired outcome. This makes sometimes
                   is not  to underestimate the  role  of empirical   difficult  for  ones  to  translate  the  idea  directly  to
                   research, but  rather, in logical  way, to contribute   practical  use or  policy actions.  However, these
                   to the balance of the comprehension gained from   kind  of researches create the ground for more
                   observed findings and mathematical proof.        practical  research branches to follow, hence
                                                                    enriching the development of taxation knowledge
                      Vast changes  occurring  in taxation world    in the long run.
                   force the stakeholders  – including researchers
                   – to respond in a  quick  way to understand what    Put it differently, it provides normative analysis
                   happens practically. This  is understandably     to lead policy makers  to rational  decision  in a
                   unavoidable, as late responds from policy makers   specific (or general) circumstance. In other words,
                   to the challenges arisen in a modern world often   as also suggested by Becker and Fuest (2011), it
                   means nothing. However, without the pursuance of   does not give positive analysis, which are the role
                   theory aspect, empirical knowledge can  possibly   of empirical research.  It  helps  to provide the
                   become spurious.                                 guidance for  empirical research to prevent them
                                                                    from spurious  knowledge that can be harmful if
                      Nevertheless,  in  conducting  theoretical  proof
                                                                    used to generate taxation policy.
                   through mathematics, one should be carefully
                   critical in framing the underlying assumptions.     Accordingly, the adjustment  of the underlying
                   Theoretical proof is an effort to snatch the reality   assumption should be of continuous consideration
                                                                    in  an  immense  changing  world  of  taxation.  More
                                                                    adjustment are even more needed for the case of
                   10. The concavity of government’s spending is first formalized in Solow   developing countries,  since  the same approach
                   (1956) on theory of economic growth. Since welfare here is function of
                   consumption on private and public goods, the concavity public provision   that works for developed countries can sometimes
                   also applies to the welfare. See Robert J. Barro, “Government Spending   not effective, or  even worsening,  for  developing
                   in a Simple Model of Endogenous Growth”, Journal of Political Economy,
                   No. 98 (1990): 103-125. See also Mostafa Beshkar and Eric W. Bond,   countries.
                   “Safeguards and Investigations”, in Rajat Acharyya and Sugata Marjit,
                   Trade Globalization and Development: Essays in Honor of Kalyan K. Sanyal,
                   (Springer, 2013).                                13.  Johannes  Becker  and  Clemens Fuest,  “Optimal  Tax  Policy When
                   11. Following Tiebout model on government provision, the government   Firms Are Internationally Mobile,”  International Tax Public Finance,  No.
                   optimization function implied in this paper is on the contrary form of   18 (2011): 580-604.
                   leviathan model. Thus,  the government’s behavior represents the   14. Goncalo Monteiro, Adam Cook, and Sanjoy Dey, “Optimal Tax
                   population’s preferences. See Charles M. Tiebout, “A Pure Theory of Local   Policy under  Habit  Formation and  Capital  Utilization,”  Journal  of
                   Expenditures”, The Journal of Political Economy, Vol. 64, No. 5 (1956):   Macroeconomics, No. 37 (2013): 230-248.
                   416-424.                                         15.  Johannes  Becker  and  Clemens Fuest,  “Optimal  Tax  Policy When
                   12. See S. Bucovetsky, “Assymetric Tax Competition”, Journal of Urban   Firms Are Internationally Mobile,”  International Tax Public Finance,  No.
                   Economics, No. 30 (1991): 167-181                18 (2011): 580-604.
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