An economist, who is also a member of the Prabowo Subianto-Gibran Rakabuming Raka National Election Team’s Expert Council, Drajad Wibowo, has warned against the potential backfire should the government continue with its plan to increase the Value Added Tax (VAT) by 12 percent next year.
He said the planned increase will have the potential to reduce tax revenue instead of increasing it, because the increase in VAT can trigger a decrease in people’s purchasing power and affect the number of taxpayers.
“As an economist, I am personally worried that the increase in VAT to 12 percent will have a negative impact on our tax revenue,” Drajad told journalists in Jakarta on Wednesday, October 9, 2024.
He, however, emphasized that his view is a personal opinion and does not represent those of the future government.
According to Drajad, the strategy to increase tax revenue is not as simple as raising rates. In fact, he sees that increasing tax rates risks making people pay taxes less often. “Like goods that are sold at a higher price, fewer people will buy them. In the end, our tax revenue could plummet,” he explained.
Drajad’s concerns are reinforced by the fact that people’s purchasing power is declining, as seen from the decreasing proportion of the middle class and the deflationary trend for five consecutive months.
He believes that this weakening purchasing power is related to the increasing number of underemployed people, which has now reached 2,41 million people.
“The undemployed people clearly have low purchasing power, and a 12 percent increase in VAT will only worsen this situation,” he added.
Furthermore, Drajad is worried that the implementation of 12 percent VAT will cause more people to be thrown out of the middle class, which will ultimately reduce consumption. “If people buy fewer goods, then VAT revenues will also be disrupted,” he concluded.
With the decline in purchasing power and the increasing number of underemployed people, Drajad warned that a 12-percent increase in VAT has the potential to widen the economic gap and weaken the state revenues from tax.
