Taxation as anessential economic tool for country to govern their economies, it is the key topromote sustainable growth and poverty reduction. Every year, governments wouldimpose varies different charges of tax rates towards individual and companies.Normally, it would govern by respective country’s tax laws to determine whoshould bear the burden or pay the tax.
Tax collection usually will perform by agovernment agency, fund that collected from taxation by government will beutilized to provide facilities for the development and population of itsnation.Inaddition, tax competition among worldwide countries force them to reform theirtax system more competitively. Besides the intensity of competition on tax, theincreases demand for public services made it become more important in terms ofraise taxes in efficient ways.
Thus, in order to design desirable tax systemsinformation, the need to understand more on the knowledge about different of taxes’harmfulness and how different types of taxes influence economic growth iscrucial. This is because various taxes and different approach creation of taxsystem may have different effects towards the level of economic activity, andindirectly influences of the economic growth of one’s countries. Policymakers and researchers have long been significant concerned on how the taxsystem affect the economic growth. Perhaps, recently, there are more studies conductedto investigate the structure of taxation and economic growth.
For example, fewresearcher papers had been carried to determine the link between tax structure,tax measures based on tax revenues, and economic growth (e.g., (Widmalm, 2001) (Arnold, 2008) (OECD, 2010)). However, it iscomplicated to draw the implication of policy, as the result from these studiesare mixed. According to Ilyas and Siddiqi (2008),the availability and mobilization of revenue is the fundamental factor tomanage and run an economy. Hence, tax revenue is a main instrument forgovernment to fund their expenditures and helps to acquire the target ofsustainability’s growth. For tax revenue, it includes both direct and indirecttaxes.
Direct taxes are income tax that collected directly from individual,companies and other persons; while, indirect taxes consist of import duties,export duties, sales tax and service tax. The relationship between taxation andeconomic growth can be positive, neutral or negative, it depends on the role oftax revenue, as it is a resource for economic. (Johansson, 2008) had conclude thatthe most damaging tax for the economic growth is the corporate tax followed byincome tax and consumption tax. Perhaps, there are number of arguments of whyhigh corporate marginal tax rates and personal-corporate rate differencesexpected might be affect consequences to the entrepreneurial activity inlong-run growth (Lee, 2005).
There are severalreasons to show that both corporate and personal income taxation have impact oneconomic growth. High corporate tax rates often assumed to be more harmful foreconomic activities than taxation of property. When higher tax rate imposes in corporatetax rates, it would lower the corporate’s income return from innovations and cutcosts on the amount spent on research and development which give negative impacton growth. Hampers of economic growth due to impose corporate taxation, as itwill discourage investments both domestically and internationally by reducingforeign direct investment. For personal incometaxes, it known as heterogeneous, because these taxes often group the incomefrom labour and capital together, and taxed at progressive rates. Hence, itlikely has different distortion effects on economics’ growth performance. Whenpersonal income taxation reduces, it will stimulate individuals’ engagement ineconomic activity.
Thispaper focus on determine the impact of taxation and taxation revenue towardseconomic growth, and examines the correlation relationship between statutorytax rates on corporate and personal income and economic growth. Tax policiescan affect growth through various channel, growth-inducing tax policy involvinga large positive incentive effects that encourage investment, saving and work,small positive or negative on income effects towards economic activity,reduction of distortion across economic sectors, and different types of incomeand consumption, and minimal increases in the budget deficit. Thus, appropriatewell-designed tax policies have potential to lead the optimal resourcesallocation and to the increase of economic growth.