NEW DELHI -- Political officials around the world, even in European welfare states, have discovered that offering tax cuts are not just a vote winner that can swing the outcome of an election. They are also a good way to spark sustained economic growth. So it is not surprising that President Susilo Bambang Yudhoyono has pledged to reduce both corporate and personal taxes to encourage increased investment in Indonesia.
Clearly he is looking beyond the bogus claim that cutting taxes benefits only the rich. Perhaps he and his advisers were impressed by the experience of other countries. For example, several economies that had veered far off their long-term growth paths during the early 1980s were revived by reductions in the marginal tax rate (amount of tax imposed on an additional unit of income).
For example, Turkey reduced its minimum marginal tax rates from 40 to 25 percent and the maximum from 75 to 50 percent in 1983 to 1984. Real economic growth was about 7 percent over the following four years and rose to 9 percent in 1990.