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Low income taxes will stimulate growth
A low personal income tax will strengthen purchasing power and consumption and push up the manufacturing industry.
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Customers crowd a supermarket in Mampang Prapatan, South Jakarta. (The Jakarta Post/Wendra Ajistyatama)
T
he government has announced a plan to lower the corporate income tax (CIT) rate from its current 25 percent down to 20 percent. If true, this is the most opportune time and a wise policy. It is especially imperative considering that the Indonesian economy has been languishing with about 5 percent growth.
In the second quarter of 2019, the growth of gross domestic product fell to 5.05 percent from 5.25 percent in the second quarter of 2018.
This also coincided with similar downturns in many important economic indicators such as the export index, which fell to an alarming negative position of minus 8.08 percent in the second quarter of 2019, versus a positive of 11.47 percent in the second quarter of 2018.
Actually, the government’s plan to reduce the CIT tax could be much more effective in inducing economic growth if the personal income tax is also lowered at the same rate or lower than the planned CIT reduction. The reason for this is simple: A low personal income tax will strengthen purchasing power and consumption and push up the manufacturing industry. As this CIT rate has also cut, the manufacturing industry will be able to increase its capacity to meet the rising demand from consumers.
This will naturally be followed by further expansion of the manufacturing industry and investment with a virtuous cycle impact that will spread to other sectors of the economy as basically the driver of industrial and investment activities is consumption.
The policy of a low CIT and similarly low or lower personal income tax have proven they have had a positive impact in many countries worldwide. One of the most outstanding examples is Russia, which lowered its corporate and personal income taxes to 20 percent and 13 percent respectively. Within a remarkably short time, this country has transformed its economy and provided its people with unprecedented prosperity.
The low income tax climate has even returned Russia back as a super power. The same type of policy was emulated by nearby Mongolia when it lowered the corporate income tax to 25 percent and personal income tax to 10 percent, resulting in spectacular GDP growth of 8.6 percent. Likewise, in the ASEAN region, Cambodia, Myanmar and Laos have also benefited from lowering their corporate and income taxes to the same levels of around 20 percent, generating respective GDPs of 7.5 percent, 6.8 percent and 6.5 percent.
