Heru Iswahyudi(1*)

(1) Ministry of Finance of the Republic of Indonesia
(*) Corresponding Author


This paper investigates how changes in the tax structure may affect Indonesia’s long-run economic growth.* The growth effects of the mix of income taxes and consumption taxes are examined using a set of panel growth regressions, which account for indicators of the tax structure, as well as both the accumulation of physical capital and human capital. The results suggest that income taxes may not exert a statistically significant impact on long-run growth, while consumption taxes may have a positive and statistically significant impact. These results, however, are not robust to changes in the regression’s specifications. Hence, although previous studies predict that the mix of direct and indirect taxes may be an important determinant of long-run growth, this paper provides evidence that, in practice, this mix is unlikely to have an impact on the long-run economic growth of Indonesia. It is therefore suggested that policy makers could instead focus their attentions on directing tax reform in Indonesia toward improving tax administration and the equity of the tax system.



consumption taxes; economic growth; income taxes; Indonesia; tax structure.

Full Text:



Acosta Ormaechea, S., & Yoo, J. (2012). Tax Composition and Growth: A Broad Cross-Country Perspective. IMF Working Paper, 12(257).

Aghion, P., Howitt, P., Howitt, P. W., Brant-Collett, M., & García-Peñalosa, C. (1998). Endogenous growth theory. MIT press.

Arnold, J. M. (2008). Do Tax Structures Affect Aggregate Economic Growth?: Empirical Evidence from a Panel of OECD Countries. OECD Economics Department Working Papers, 643. doi:

Arnold, J. M., Bassanini, A., & Scarpetta, S. (2007). Solow or Lucas?: Testing growth models using panel data from OECD countries. OECD Economics Department Working Papers No. 592

Arnold, J. M., Brys, B., Heady, C., Johansson, Å., Schwellnus, C., & Vartia, L. (2011). Tax policy for economic recovery and growth. The Economic Journal, 121(550), F59-F80.

Aschauer, D. A. (1989). Is public expenditure productive?. Journal of monetary economics, 23(2), 177-200.

Atkinson, A. B., & Stiglitz, J. E. (1976). The design of tax structure: direct versus indirect taxation. Journal of Public Economics, 6(1), 55-75.

Bank Indonesia. (2017). Indonesian Financial Statistics. Retrieved from:

Barro, R. J. (1989). A Cross-Country Study of Growth, Saving, and Government: National Bureau of Economic Research, Inc.

Barro, R. J., & Redlick, C. J. (2011). Macroeconomic effects from government purchases and taxes. The Quarterly Journal of Economics, 126(1), 51-102.

Barro, R. J., & Sala-i-Martin, X. (2004). Growth models with consumer optimization. Economic Growth (Second ed.). New York: McGraw-Hill, 85-142.

Basri, M. C., & Patunru, A. A. (2012). How to keep trade policy open: the case of Indonesia. Bulletin of Indonesian Economic Studies, 48(2), 191-208. doi: 10.1080/00074918.2012.694154

Bird, R. M. (2004). Administrative dimensions of tax reform. Asia-Pacific Tax Bulletin, 10(3), 134-150.

Boone, L., Girouard, N., & Wanner, I. (2001). Financial market liberalisation, wealth and consumption. OECD Economics Department Working Papers(308). doi:

Brondolo, J., Silvani, C., Le Borgne, E., & Bosch, F. (2008). Tax administration reform and fiscal adjustment: the case of Indonesia (2001-07). IMF Working Papers, 1-70.

Caballé, J., & Panadés, J. (1997). Tax evasion and economic growth. Public Finance/Finances Publiques, 52(2), 318-340.

Comin, D., & Hobijn, B. (2004). Cross-country technology adoption: making the theories face the facts. Journal of monetary economics, 51(1), 39-83.

Crafts, N. F. (1996). Endogenous growth: lessons for and from economic history. CEPR Discussion Papers.

Dahlby, E. F. B., & Ferede, E. (2012). The impact of tax cuts on economic growth: evidence from the Canadian provinces. National Tax Journal, 65(3), 563-594.

Easterly, W., & Levine, R. (2003). Tropics, germs, and crops: how endowments influence economic development. Journal of monetary economics, 50(1), 3-39.

Easterly, W., & Rebelo, S. (1993). Marginal income tax rates and economic growth in developing countries. European Economic Review, 37(2-3), 409-417.

Ebrill, L., Keen, M., Bodin, J.-P., & Summers, V. (2001). The modern VAT. Washington, D.C.: International Monetary Fund.

Ercolani, V., & e Azevedo, J. V. (2014). The effects of public spending externalities. Journal of Economic Dynamics and Control, 46, 173-199.

Feenstra, R. C., Inklaar, R., & Timmer, M. P. (2015). The next generation of the Penn world table. American Economic Review, 105(10), 3150-3182.

Fisman, R., & Love, I. (2003). Financial development and the composition of industrial growth: National Bureau of Economic Research.

Gemmell, N., Kneller, R., & Sanz, I. (2011). The timing and persistence of fiscal policy impacts on growth: evidence from OECD countries. The Economic Journal, 121(550), F33-F58.

Gemmell, N., Kneller, R., & Sanz, I. (2014). The growth effects of tax rates in the OECD. Canadian Journal of Economics/Revue canadienne d'économique, 47(4), 1217-1255.

Gillis, M. (1989). Comprehensive tax reform: the Indonesian experience, 1981-1988. In M. Gillis (Ed.), Tax reform in developing countries. Durham, USA: Duke University Press.

Gillis, M., Shoup, C. S., & Sicat, G. P. (1990). Lessons for developing countries. In M. Gillis, C. S. Shoup & G. P. Sicat (Eds.), Value Added Taxation in Developing Countries (A World Bank Symposium). Washington, D. C.: The World Bank.

Harberger, A. C. (1964a). The measurement of waste. The American Economic Review, 54(3), 58-76.

Harberger, A. C. (1964b). Taxation, resource allocation, and welfare. The Role of Direct and Indirect Taxes in the Federal Reserve System (pp. 25-80): Princeton University Press.

Hungerford, T. L. (2012). Taxes and the economy: an economic analysis of the top tax rates since 1945. CSR Report for Conggress: Conggressional Research Service.

Immervoll, H. (2000). The impact of inflation on income tax and social insurance contributions in Europe: EUROMOD Working Paper.

Indonesia Government. (2008). Undang-Undang Pajak Penghasilan (Income Tax Law).

Isaksson, A. (2007). Determinants of total factor productivity: a literature review. UNIDO Research and Statistics Staff Working Paper, (2). United Nations Industrial Development Organization, Vienna.

James, K. (2015). The rise of the value added tax. New York: Cambridge University Press.

Johansson, Å., Heady, C., Arnold, J., Brys, B., & Vartia, L. (2008). Tax and economic growth. OECD Economics Department Working Paper. Paris: OECD.

Katz, C. J., Mahler, V. A., & Franz, M. G. (1983). The impact of taxes on growth and distribution in developed capitalist countries: a cross-national study. American Political Science Review, 77(4), 871-886.

Khan, M. S., & Reinhart, C. M. (1990). Private investment and economic growth in developing countries. World Development, 18(1), 19-27.

Kneller, R., Bleaney, M. F., & Gemmell, N. (1999). Fiscal policy and growth: evidence from OECD countries. Journal of Public Economics, 74(2), 171-190.

Koester, R. B., & Kormendi, R. C. (1989). Taxation, aggregate activity and economic growth: cross‐country evidence on some supply‐side hypotheses. Economic Inquiry, 27(3), 367-386.

Kutner, M. H., Nachtsheim, C., & Neter, J. (2004). Applied linear regression models (4 ed.): McGraw-Hill/Irwin.

Lee, Y., & Gordon, R. H. (2005). Tax structure and economic growth. Journal of Public Economics, 89(5), 1027-1043.

Levine, R., & Renelt, D. (1992). A sensitivity analysis of cross-country growth regressions. The American Economic Review, 942-963.

Levine, R., & Zervos, S. J. (1993). What we have learned about policy and growth from cross-country regressions? The American Economic Review, 83(2), 426-430. doi: 10.2307/2117702

Lucas, R. E. (1988). On the mechanics of economic development. Journal of monetary economics, 22(1), 3-42.

Madsen, J., & Damania, D. (1996). The macroeconomic effects of a switch from direct to indirect taxes: an empirical assessment. Scottish Journal of Political Economy, 43(5), 566-578.

Mendoza, E. G., Milesi-Ferretti, G. M., & Asea, P. (1997). On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture. Journal of Public Economics, 66(1), 99-126.

Mertens, K., & Ravn, M. O. (2013). The dynamic effects of personal and corporate income tax changes in the United States. American Economic Review, 103(4), 1212-1247.

Miller, S. M., & Russek, F. S. (1997). Fiscal structures and economic growth: international evidence. Economic Inquiry, 35(3), 603.

Myles, G. D. (2007). Economic growth and the role of taxation: Report for OECD.

Myles, G. D. (2009). Economic growth and the role of taxation-aggregate data: OECD Publishing.

OECD. (2007). Consumption taxes: the way of the future? OECD Observer.

Pack, H. (1994). Endogenous growth theory: intellectual appeal and empirical shortcomings. The Journal of Economic Perspectives, 8(1), 55-72.

Penn World Table. (2017). Index of human capital per person. Retrieved from:

Poterba, J. M., Rotemberg, J. J., & Summers, L. H. (1986). A tax-based test for nominal rigidities. The American Economic Review, 659-675.

Prawiro, R. (1998). Pergulatan Indonesia membangun ekonomi: pragmatisme dalam aksi (Indonesian struggle of economic development: pragmatism in action). Jakarta: Elex Media Komputindo.

Quah, D. (1993). Galton's fallacy and tests of the convergence hypothesis. The Scandinavian Journal of Economics, 95(4), 427-443. doi: 10.2307/3440905

Rebelo, S. (1991). Long-run policy analysis and long-run growth. Journal of political Economy, 99(3), 500-521.

Romer, & Romer. (2010). The macroeconomic effects of tax changes: estimates based on a new measure of fiscal shocks. The American Economic Review, 100(3), 763-801.

Romer, P. M. (1986). Increasing returns and long-run growth. Journal of political Economy, 94(5), 1002-1037.

Romer, P. M. (1994). The origins of endogenous growth. Journal of Economic Perspectives, 8(1), 3-22.

Shalizi, Z., & World Bank Group. (1991). Lessons of tax reform. Washington, D. C.: The World Bank.

Simarangkir, G. S., & Nakamura, O. (2010). The effect of direct tax and indirect tax on gross domestic product of Indonesia: macroeconometric model. Universitas Gadjah Mada.  

Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65-94. doi: 10.2307/1884513

Swan, T. W. (1956). Economic growth and capital accumulation. Economic Record, 32(2), 334-361. doi: 10.1111/j.1475-4932.1956.tb00434.x

Taylor, R. J. (2007). Technical progress and economic growth: an empirical case study of Malaysia. Cheltenham, UK: Edward Elgar Publishing.

Usui, N. (1997). Dutch disease and policy adjustments to the oil boom: a comparative study of Indonesia and Mexico. Resources Policy, 23(4), 151-162. doi:

Vartia, L. (2008). How do taxes affect investment and productivity?: An Industry-Level Analysis of OECD Countries: OECD Publishing.

Wells, L. T., Allen, N. J., Morisset, J., & Pirnia, N. (2001). Using tax incentives to compete for foreign investment. FIAS Occasional Paper, 15.

Widmalm, F. (2001). Tax structure and growth: are some taxes better than others? Public Choice, 107(3-4), 199-219.

World Development Indicators. (2017). World development indicators. Retrieved from:

Worlu, C. N., & Nkoro, E. (2012). Tax revenue and economic development in Nigeria: a macroeconometric approach. Academic Journal of Interdisciplinary Studies, 1(2), 211-223.


Article Metrics

Abstract views : 197 | views : 281


  • There are currently no refbacks.

Copyright (c) 2018 Journal of Indonesian Economy and Business

Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Journal of Indonesian Economy and Business


Editorial Team
Focus and Scope
Peer Review Process
Publication Ethics
Screening for Plagiarism


Author Guidelines
Submission Guidelines
Online Submissions
Copyright Notice
Privacy Statement
Author Fees


Author Pack
Submission Form & Manuscript Template



Reviewer Guidelines
Reviewer Acknowledgement



General Search
Author index
Title index



The Journal of Indonesian Economy and Business (print ISSN 2085-8272; online ISSN 2338-5847) is published by the Faculty of Economics and Business Universitas Gadjah Mada, Indonesia. The content of this website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License

© 2019 Journal of Indonesian Economy and Business 
 Visitor Statistics