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Excessive taxes may stifle economic growth: CSIS
The think tank suggested that an increase in revenue should be achieved by reducing tax incentives, such as those given to smelter operators.
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A tax officer consults a taxpayer on Sept. 1, 2020, in the Cicadas area of the West Java capital of Bandung. (Courtesy of/Bandung tax office)
T
he next administration should prioritize efficient spending over aggressive tax collection, as the latter could prove counterproductive and harm the economy, the Centre for Strategic and International Studies (CSIS) has warned.
The 2025 budget, presented by President Joko “Jokowi” Widodo in his State Budget Address on Friday, increases overall spending but leaves ample room for adjustments as much of the projected state revenue remains unallocated, allowing president-elect Prabowo Subianto to accommodate his policies.
CSIS economic researcher Deni Friawan said limited fiscal space made Indonesia vulnerable to external pressures. To create more fiscal room while maintaining purchasing power, he suggested that the next administration focus on enhancing the efficiency of government spending.
Aggressive measures to increase tax revenue, such as by hiking the value-added tax (VAT) rate from 11 percent to 12 percent, could harm the economy, he warned, and ultimately reduce state revenue instead of increasing it, contrary to the objective.
“In economics, there is a concept called the Laffer curve, which identifies the optimal tax rate. If you exceed [the optimal rate], revenue actually declines,” Deni explained during a press briefing on Monday.
The Harmonized Tax Law (HPP Law), passed in 2021, mandated an increase in the VAT from 10 percent to 11 percent in April 2022 and then to 12 percent in January 2025.
Asked whether the 2025 state budget would include the VAT increase, Finance Minister Sri Mulyani Indrawati explained that the budget reflected the country’s economic potential, tax ratios, tax intensification and extensification as well as the available sources of revenue.
