The Relationship between Tax Incidence and Tax Avoidance in Indonesia’s Industrial Sector

Abstract

Taxes are believed to distort how firms behave and market equilibrium. Since tax reduces equity returns, firms will intuitively reduce tax costs through tax avoidance and any other production or operational cost to achieve the highest returns. One of the production costs that often under hair cross is labour cost. Firms can use their bargaining power to reduce wages to offset tax costs. On the other hand, firms' attempt to reduce wages might, in turn, lower their production output. Lower output means a lesser taxable base and less marginal benefit for tax avoidance. Lower output also means lower equity returns and might incentivize firms to do more tax avoidance. Therefore, many researchers are looking for answers to the following question: how much do firms avoid tax in the face of their capability to shift the tax burden to labour? This study aims to investigate the relationship between tax incidence and tax avoidance in the industrial sector in Indonesia. While previous studies have shown solid empirical support for this relationship, Indonesia's employment conditions and industrial characteristics differ from those in the United States and other countries. The data for the study was taken from the reports of IDX-listed companies in the industrial sector ranging from the year 2018 to the year 2022. The data analysis uses Generalized Least Square (GLS) panel data regression. Using education level as a proxy for tax incidence and cash ETR as a proxy for tax avoidance, the authors found no significant connection between them because the industrial sector predominantly employs a much higher number of workers with low education levels compared to those with higher education. Additionally, highly educated workers in Indonesia often face job market challenges; thus, horizontal mismatches happen. Instead, other variables like sales growth, leverage, firm size, SG&A expenses, and loss carryforward significantly influence tax avoidance.