Indonesia’s Tax Revenue: Is It Sustainable and a Good Automatic Stabilizer?

Objectives: This study aims to analyze Indonesia’s long-run and short-run tax buoyancy in the context of the new government’s priorities: implementing the MBG to support the Sustainable Development Goals (SDGs) and achieving economic growth of 8%. Given Indonesia’s relatively low tax ratio, the research seeks to assess whether domestic tax revenues are sustainable in the long run and capable of functioning as an automatic stabilizer in the short run. Theoretical Framework: The study is grounded in public finance theory, particularly the concept of tax buoyancy, which measures the responsiveness of tax revenue to changes in economic growth. Tax buoyancy serves as an indicator of fiscal sustainability and the effectiveness of tax systems in supporting economic stability. The analysis focuses on Indonesia’s structural tax components—corporate income tax (CIT), personal income tax (PIT), value added tax (VAT), and excise tax—as key instruments for mobilizing domestic revenue. Method: The research employs econometric techniques to estimate tax buoyancy across different time horizons. The Fully Modified Least Squares (FMOLS) method is used to estimate long-run tax buoyancy coefficients, while the Autoregressive Distributed Lag (ARDL) model is applied to assess short-run tax buoyancy. These methods are used to evaluate total tax revenue as well as individual tax components, including CIT, PIT, VAT, and excise taxes. Results and Discussion: The results indicate that the long-run tax buoyancy of total tax revenue, PIT, VAT, and excise taxes is greater than one, suggesting that these taxes—excluding CIT—are sustainable and capable of supporting Indonesia’s fiscal budget in the long run. In contrast, short-run tax buoyancy for total tax revenue, PIT, VAT, and excise taxes is less than one, indicating that they do not function effectively as automatic stabilizers during short-term economic fluctuations. This highlights a structural limitation in Indonesia’s tax system in responding quickly to changes in economic activity. Research Implications: The findings have important implications for fiscal policy design in Indonesia. They suggest the need for tax reforms aimed at enhancing short-term responsiveness and improving the stabilizing role of the tax system. Strengthening tax administration, broadening the tax base, and increasing compliance could help improve tax performance and support economic growth aligned with the SDGs. Originality/Value: This study provides a comprehensive assessment of Indonesia’s tax buoyancy by distinguishing between long-run sustainability and short-run stabilization capacity. By applying FMOLS and ARDL methods to multiple tax components, the research offers valuable empirical evidence on Indonesia’s fiscal space and highlights opportunities for strengthening domestic revenue mobilization in support of sustainable development and long-term economic growth.