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Enter presidential candidates’ tax cut contest
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Presidential and vice presidential candidates (from left to right) Ma'ruf Amin, Joko "Jokowi" Widodo, Prabowo Subianto and Sandiaga Uno. (kompas.com/Abba Gabrilin)
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n front of thousands of businessmen who flocked to Senayan sports complex in Jakarta recently, President Joko “Jokowi” Widodo gave a campaign speech in which he promised to reduce corporate income taxes if he is reelected as president, a promise that was warmly welcomed by the audience.
The Prabowo Subianto-Sandiaga Uno camp, the rival presidential and vice-presidential candidates, also vowed to cut taxes although the emphasis was on reducing personal income taxes.
The economic argument behind the proposed tax cuts is the belief that if tax is reduced, businesses will have an incentive to invest and households will have incentives to consume. As the economy grows, this will increase government revenues, which will more than compensate for the tax cut that the government has provided.
An economist from the Prabowo-Sandiaga camp, Dradjad Wibowo even invoked the famous Laffer curve as justification for that proposal. The Laffer curve, developed by American economist Arthur Laffer appears to demonstrate the relationship between tax cuts and economic growth, where it shows that when tax rates are reduced, businesses expand their activities, and economic growth accelerates, providing higher tax revenues that more than cover the initial losses from the tax reduction.
But this theory has been disputed. Paul Krugman, the Nobel laureate in economics has shown that between 1957 and 2017 the top tax rate in the United States went down from 90 to 40 percent.
But it barely had any impact on economic growth. During that period, growth reached the highest level in 1966 at 3.3 percent. But since then growth plummeted to less than 1 percent in 2017.
Also, United States President Donald Trump’s recent tax cut policy has not produced an impact on US economic growth. After strengthening for a while, US economic growth is now weakening. A worldwide drop in stock prices recently showed that global markets are concerned that the US economy is on the brink of recession.
