Tax counterbalancing in developing countries the case of Indonesia

Abstract

This research is devoted to test the feasibility of tax counterbalancing policy in developing country with focus on Indonesia. This research is motivated by the fact that the corporate income tax rate in Indonesia is relatively high compared to other south east Asian countries. The method uses the (quadratic) almost ideal demand system which has been widely used to analyze the demand system simultaneously. The estimation usesseemingly unrelated regression estimation approachwith quarterly data during the period of 2001-2016. The result presents that tax counterbalancing policy can be implemented in the short term. The reduction in corporation income tax rate imposed on the primary sectors can be substituted by the increase in tax rate in services sector. By removing informal sector, tax counterbalancing policy will potentially address not only the soundness of state budget but also promote the economic development. Eventually, fiscal policy could play an important role both in stimulation and stabilization in the long run.

The potential growth impact of fiscal consolidations

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