Taxation and Economic Development among Pacific Asian Countries

By Richard A. Musgrave; Ching-Huei Chang et al. | Go to book overview
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Indonesian Tax Reform, 1985-1990

Malcolm Gillis

1. Introduction

The years 1950-1990 were marked by major alterations in what formerly passed for "received wisdom," not only in taxation but in development finance in general. Lessons of experience were primarily responsible for these changes; improvements in understanding of the economics of the public sector and of inflation also contributed. These shifts were well under way in many developing countries ( Gillis, 1989a) even prior to the much-discussed fiscal revolution in the United States in the 1980s, which culminated in the passage of the Tax Reform Act of 1986.

As recently as the 1960s, the structuralist school, particularly those economists ensconced in the United Nations Economic Commission for Latin America (ECLA), argued forcefully not only that inflation was an inevitable outgrowth of healthy development processes but also that moderate inflation was altogether appropriate as one of the pillars of government finance ( Seers, 1962; Hirschman, 1963). This view was widely accepted for well over a decade, particularly in Latin America. The so-called two-gap macromodels of the 1960s pointed to the criticality of foreign aid in development finance: Both domestic savings and foreign exchange constraints on growth could be greatly relaxed, if not dissolved, by appropriate inflows of foreign aid ( Chenery and Strout, 1966). Later, with the rise of Eurocurrency markets in the 1970s, government resort to foreign commercial borrowing came to be viewed not only as an alternative to foreign aid but in many nations as a substitute for further efforts to mobilize domestic resources through the tax and financial system. Tax systems themselves were commonly fine-tuned in order to achieve a wide variety of nonrevenue objectives. In particular, governments of developed and developing nations alike commonly sought substantial income redistribution through the use of steeply progressive tax rates. Also, complex and largely inadministerable systems of tax


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