CEDS UNPAD

Lessons From Previous Taxes’ Studies To Indonesian Local And Regional Governments After Fiscal Decentralization

One consequence of Indonesian fiscal decentralization is that local governments will have to seek additional revenues coming from their own resources, especially local taxes. For the first year of the implementation of decentralization alone, they had authorized approximately 1000 new taxes and charges in order to increase revenues with hoping these taxes would help to boost their local economic growth. The effects of taxes on the economic growth have been an interesting topic for decades in all around the nation. However, empirical studies of the relationship between taxes and economic growth have produced inconsistent results. This paper attempts to study the effect of taxes on economic growth by conducting a quite massive literature review of the relationship between taxes and economic growth. Tax variables in the state level studies are shown to have ambiguous effects on the economic growth. On the other hand, tax variables in international level studies are generally shown to have a negative effect on economic growth. The policymakers in Indonesian local governments need to be careful in designing a new tax structures after fiscal decentralization. Imposing new taxes to pump up revenues with hoping that it would help boosting the economic growth or improving the economic performance should also consider the fact that taxes tend to have a negative effect on economic growth.

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Center for Economics and Development Studies is a research center under the Department of Economics, Padjadjaran University, Indonesia. A leading research institute in Indonesia in the area of economics and development studies.
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