How Buoyant is Indonesia's Tax System? An Empirical Analysis

Abstraksi

Fiscal deficit is the core issue of most of the developing countries over the past several decades. Some countries have used option of putting pressure on public finances, but this may create a risk of fiscal unsustainablity in the long term. Another approach is to assess the revenue side of the budget. This is what tax buoyancy is for; to measure how tax revenue vary with changes in GDP. This paper aims to examines Indonesia’s tax buoyancy and its determinants. Eventually this study also examines the buoyancy of tax revenues to changes in economic growth or GDP. This paper estimates quarterly data of GDP and tax revenues of Indonesia for the period from 2005 to 2018 and utilizes ordinary least square (OLS) method for result analysis. The result shows that for the past six years, Indonesia finally has a tax buoyancy exceeding one (1.42), which means an increase of 1% GDP would increase tax revenue by 1.42%, and lead to considerable reductions in fiscal deficit. The result also proves that growth in import and manufacturing sector, and money supply have positive impact on growth of tax collection. Finally, this paper also assesses the buoyancy of tax revenue components, showing that the main causes of current upsurge are from corporate income tax and value-added tax on imported goods. For further research, it would be interesting to expand the analysis to tax elasticity, which correct revenue performance for changes in policy parameters. However, this requires more detailed information about underlying tax reforms and their revenue impacts.