Taxation and Sustainable Development

Tax is a word that can be considered sensitive for the public, particularly when the economy is struggling. People with limited financial literacy tend to view tax as an expense burden.

To date, sufficient awareness has yet to develop that taxes paid to the state return to the public in the form of goods and services. Tax revenue is state income used to fund government spending, as set out in the state budget, the Anggaran Pendapatan dan Belanja Negara (APBN).

According to Statistics Indonesia (BPS), Indonesia’s tax revenue over the past five years was Rp1,547.84 trillion in 2021, Rp2,034.55 trillion in 2022, Rp2,154.21 trillion in 2023, Rp2,309.86 trillion in 2024 and Rp2,387.28 trillion in 2025.

Revenue rose significantly between 2021 and 2022, followed by more gradual increases. The government uses this tax revenue to finance expenditure.

Building and maintaining infrastructure, and delivering services and programmes related to health, education, transport, social protection and other public activities, require substantial funding. In this context, tax revenue means far more than a series of figures in the state budget.

In its 2024 publication, OECD Contributions to the 2030 Agenda and Beyond: Shaping a Sustainable Future for All, the Organisation for Economic Co-operation and Development (OECD) described tax revenue as the largest and most sustainable component of development financing.

Taxes do not only fund public services; they can also help reduce economic inequality. Certain taxes, such as excise duties, can influence behaviour in ways that improve health and the environment.

Tax is about more than raising revenue

As S.J. Taylor wrote in the 2016 paper A Review of Sustainable Development Principles, published by the Centre for Environmental Studies, sustainable development requires a balance between three pillars: economic growth, social wellbeing and environmental protection. Tax policy should therefore not focus solely on maximising revenue.

Good tax policy should create a conducive environment and room for businesses and the public to grow, while safeguarding social wellbeing. Certain taxes can also serve as fiscal instruments for environmental protection, including excise duties and environmental taxes. In a simple cycle, taxation helps create the conditions for national progress: the activities of the public and businesses generate economic value, ultimately enabling society to develop a stronger capacity to pay taxes.

The process begins with economic activity by the public and businesses, followed by the fair collection of taxes by the state. Tax revenue is then used to provide services and public investment, boosting productivity and quality of life. As living standards improve, the economic base and the ability of the public and businesses to pay taxes are strengthened.

Tax theory as an instrument of redistribution

In his 1959 book The Theory of Public Finance: A Study in Public Economy, Richard A. Musgrave argued that government fiscal policy has three functions: allocating resources, distributing or redistributing income, and stabilising the economy. A key principle of public economics is that tax does not merely provide revenue for the state; it is also an instrument of redistribution. From this perspective, tax systems are designed so that those with greater economic means make a relatively larger contribution.

Tax revenue collected by the state is used to provide public goods and services and to support people in need. This is relevant to sustainable development, which cannot be achieved if economic growth benefits only a small section of society. Quality education, effective health services, social protection, basic infrastructure and programmes to raise productivity are examples of how state revenue can reduce inequality of opportunity and support sustainable economic activity.

Pigouvian theory

In his 1920 book The Economics of Welfare, Arthur Cecil Pigou argued that economic activity can affect social welfare when the decisions of individuals or companies create benefits or costs for others that are not reflected in market prices. In short, markets do not always produce efficient outcomes because of externalities.

Negative externalities can be addressed by imposing taxes on market participants that create them, with the aim of improving fairness in the market. Pollution, congestion, environmental damage and other impacts that reduce overall efficiency are examples of activities that could be taxed. Excise duties or environmental taxes could be used for this purpose.

Revenue from excise duties or environmental taxes on goods or activities that generate negative externalities could then be returned through earmarking. One existing example in Indonesia is the Revenue-Sharing Fund for Tobacco Products Excise (DBHCHT).

Although it represents only a small percentage of excise revenue, this policy could serve as a model. Revenue-sharing funds from excise duties can be used to improve health and the environment, including by providing incentives to businesses or groups working in more environmentally friendly sectors, such as new and renewable energy and environmentally friendly plastics.

Tax revenue that supports sustainable development is not simply a matter of how much is collected. Government tax policy must be fair, stable and productive, and create room for businesses and the public to prosper in the future. Stronger and more evenly distributed economic growth will generate greater added value and help sustain the tax base. Alongside sound policy, this requires clean and transparent tax governance and administration.

Redistribution theory reminds us that taxation should help create a more inclusive society, while Pigouvian theory shows how taxes can correct economic behaviour that produces negative externalities. Taxation can therefore play a strongly positive role in achieving the Sustainable Development Goals. This scenario must be put into practice if it is to become reality rather than remain a utopia.