Indonesia Considering Lower, But Stricter, Taxes

Over a week ago, Indonesian president Joko Widodo announced that he would like to lower the country's corporate tax rate. In addition, he is considering a more drastic change of converting one of the nation's islands into a tax haven.

The proposed decrease of 8% would reduce the corporate tax rate to 17%. The decision remaining is whether to cut the rate all at once or gradually. However, the proposal still requires the approval of the country's parliament, which may be done as soon as next year.

President Widodo reasons that Indonesia's corporate tax rate should rival its proximate island neighbor, Singapore. He is hoping that a competitive rate will attract foreign expansion and allow foreign companies to use more of their revenues to reinvest into the country. In addition, a lower rate would encourage domestic companies to keep their money in Indonesia.

There are two ways to look at this proposal from an economist's perspective. The lower corporate tax rate could lead to growth of companies in Indonesia, which will then result in more tax revenue. On the other hand, if the lower rate is inadequately enticing for foreign expansion and domestic revenues remain more or less stagnant, tax revenue will surely fall.

While the parliament considers officially enacting the lower tax rate, President Widodo is working closely with Sri Mulyani Indrawati, the country's finance minister, to crack down on tax evaders. Not only does she want to be more strict to those who don't pay taxes, she is implementing internal reforms to remove incompetent and corrupt officials.

If it is the former of the two previously described economic outcomes that occurs, combined with stricter tax compliance regulations, Indonesia may see higher tax revenue in the long term.