Estimating the Causal Impact of the 2008 Tax Reforms in Indonesia: Evidence from the Synthetic Control Method

Stable and sustainable fiscal resources are foundational to government operations, enabling the provision of public services, investments, and economic management. It is thus critical to strengthen domestic tax revenues through tax reforms. Indonesia has implemented a series of tax reforms since the 1980s, and one of the milestone reforms were conducted in 2008. This study estimates the causal impact of Indonesia fs 2008 tax reforms on revenue mobilization, foreign direct investment, and the underground economy. The study applies the Synthetic Control Method (SCM) to construct a counterfactual scenario that represents Indonesia in the absence of the reforms. The results show that, while the reforms increased tax revenue, particularly direct tax revenue, in the first year, it had declined in the subsequent years. This result is supported by another result of an increasing underground economy after the reforms. These findings are consistent with other studies suggesting that the mechanical effects of tax reform may exceed its behavioural effects, leading to a negative overall impact on revenue performance. This study also finds that the reforms had no significant effect on foreign direct investment even after eight years of implementation. This study contributes to the empirical literature on the measurement of tax reform impacts with the application of the SCM and proposes policy insights for future tax reform design and evaluation, particularly in Indonesia.