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Many economists have stated that the government through its either fiscal policies or monetary policies has an important role in supporting economic growth of a country. As the consequence of government's role in the development process, the size of the government - measured as the ratio of total spending to GDP also expanded along with the economic development. This is the fact faced by any country in the world. However, the growth of government's size implies higher taxation, and thus, it sometimes becomes a bad sign for the whole economy. The higher tax collected by the government the more productive sources taken by the government from the private sector. If positive impacts of government spending can not exceed negative impacts caused by the lost of productive sources of private sectors deadweight loss of economy will appear.By assuming that the government runs balanced budget in which a 11 o f the government expenditure is financed by tax revenue, the so-called the growth maximizing tax rate can be estimated. This rate measures the ratio of tax revenue to GDP that is needed to achieve the high and stable growth rate.The main objective of this study are to find the growth maximizing tax rate for Indonesia and to analyze whether Indonesia has achieved this optimum point, or has been operating below it or contrary above it. It is necessary to estimate such rate for Indonesia since achieving high growth rate has been the main focus of the government and also considering the fact that recently tax revenue has been the primary revenue sources to finance government expenditures.Following most studies in this field, this study will also use the econometric method using data from 1961-1997 in order to find the growth maximizing tax rate for Indonesia. First of all, a theoretical model that based on AK model developed by Robert J. Barro had been formulated. Based on that theoretical model, a regression equation - a quadratic function - had been derived and used in the empirical test.The regression result shows that the growth maximizing tax rate for Indonesia is 17.8%, far above the average actual ratio of tax revenue to GDP during the period 1961-1999 (13.9%). If this growth maximizing tax rate can be achieved the annual growth rate of real GDP per capita would be 5.1%, far above the average actual growth rate during the period 1961-1995 (3.8%). Furthermore, if this growth maximizing tax rate can be achieved since 1961, the effects will be on (1) Total tax revenue collected during the period 1961-1999 will be Rp. 1,115 triliun; Rp. 149 higher than actual tax collected during that period (Rp. 966 triliun), (2) Real GDP per capita in 1997 (1996 prices) will be Rp. 4.390.215,- or 58% higher than actual Real GDP per capita at that year (Rp. 2.773.651,-), and (3) Real GDP in 1997 (1996 prices) will be Rp. 877 triliun, far above the actual Real GDP at that year (Rp. 554 triliun).Some policy implications that can be taken considering the result of this study are: (1) This study suggests that there is a room for the government to collect more tax revenues considering the fact that recently Indonesia is operating below the growth maximizing tax rate point, (2) To achieve this objective, increasing tax rates is not an appropriate policy. Instead, the government should maintain the reform spirit and continue its effort to create and develop an effective and efficient administration system, (3) This study also implies that government should increase its expenditure but it should carefully decide types of expenditures since each type of expenditures has a different impact on the economic growth. |
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