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Economic Consequences of Tax Non-Compliance: Evidence From Indonesia

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  • Iswahyudi, Heru

Abstract

This article aims to assess the consequences of tax noncompliance on Indonesia’s economic growth in the perspective of the endogenous growth theory. The assessment is achieved by comparing the marginal productivity of public sector investment (which is mostly financed by tax revenues) with the marginal productivity of private sector investment (which could be financed by the proceeds available from nonconformity to tax laws). Empirical results in this study show that private sector investment has higher productivity than public sector investment. Further, it seems that the role of private investment in the process of economic growth is much larger and more important than public investment and these results are robust across several regression specifications. These do not necessarily mean that tax noncompliance should be left uncontrolled by the tax authority. However, since the extent of tax compliance (or noncompliance) may affect the availability of capital to be used for investment by the private sector, it is therefore suggested that expansionary fiscal policies financed through excessive tax enforcements may need to carefully consider the productivity constraints that might be faced by public sector investments.

Suggested Citation

  • Iswahyudi, Heru, 2018. "Economic Consequences of Tax Non-Compliance: Evidence From Indonesia," MPRA Paper 122337, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:122337
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    More about this item

    Keywords

    Tax Noncompliance; Capital Accumulation; Economic Growth; Productivity; Endogenous Growth Theory;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

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