Law Encorcement on Tax Imposed and Economic Growth

• Author: Bernard Nainggolan
• Position: Faculty of Law, Universitas Kristen Indonesia
• Pages: 228-235

Vol. 4 No. 1

January, 2020

European Journal of Economics, Law and Social Sciences

IIPCCL Publishing, Graz-Austria

ISSN 2519-1284

Acces online at www.iipccl.org

228

Law Encorcement on Tax Imposed and Economic Growth

Bernard Nainggolan

Faculty of Law, Universitas Kristen Indonesia

Abstract

Classical economic theory states that one factor that causes market failure is tax imposed.

With tax imposed, the allocation of goods and services in free market is not Pareto e cient.

Studies on the impact of tax on economic growth result various conclusions. It can be negative

(Lee, Young, and Gordon 2005), negative and unclear (Gale and Samwick 2017), andpositive

(Brys et al. 2016). This study is conducted to study the association between tax imposed and

economic growth in 116 countries from 2005 to 2017. The data used in this study came from

the World Development Indicators of the World Bank and were analyzed using univariate,

bivariate, and multivariate analyses employing the fi xed e ects regression model for panel

data. The dependent variable was GDP, while the independent variables were taxes on

income, profi ts, and capital gains (% of total taxes), other taxes (% of revenue), labor tax and

contributions (% of commercial profi ts), andaccess to electricity (% of population). The results

of analyses show that taxes on income, profi ts, and capital gains, labor tax and contributions,

andaccess to electricitytaxesare positively and signifi cantly associated with economic growth

ratestatistically, while other taxes is negatively and signifi cantly associated with economic

growth rate statistically.

Keywords: Tax Imposed, Economic Growth, Neoclassical theory, market failure, Random

e ect.

Introduction

In the classical economic theory, market failure is a situation where the allocation

of goods and services in free market is not Pareto e cient that o en causes a net

loss of economic value. The market failure terminology was fi rst proposed by

Victorian philosopher Henry Sidwigk (Krugman and Robin 2006; Bator1958).Market

failure is o en associated with government intervention in the provision of public

goods, time-inconsistent preferences,information asymmetries,non-competitive

markets, principal–agent problems, or externalities. Government intervention that

has impacts on ine cient resources allocation, o en called government failure.

Goernment failure that can cause market failure can be in form of policies, such as

tax, subsidy, wage and price control, and regulation that cause market failure (Furton

and Adam 2019; Shand 1987;Schmidtz 1993).

Aaron Levine (Paour 1995) proposed that income distribution, risk management,

and product-pricing problem need government intervention. He emphasized the use

of a comparative-institutions approach in assessing government actions to correct

market “failure.” It can happen if the government does not intervene the market then

the situation will be worse. How does the government get involved in the market?