Trickle Down Effect and People’s Economy

The rickle down effect is an economic concept adopted by the United States in the context of economic development. This concept is an economic theory introduced by Albert Hirschman and popularized by Ronald Reagan, the 40th President of the United States who was supported by the Republican Party at that time.

The concept of the trickle down effect is to give concessions to the rich or capital owners which in turn will encourage economic growth. The focus of economic policy should be on those groups according to the policy. By doing so, they will create more employment and income opportunities, which will have an impact on the poor and the country.

The concept of trickle down effect is also in line with spillover effects, namely the occurrence of phenomena or events that have positive and negative effects on the economy, social and politics. When economic benefits are obtained by the upper class society, it is expected that it will have a positive impact on society at the lower levels.

Procedure

The trickle down effect states that the best way to encourage a country’s economic growth is to let the rich or the owners of capital develop. The government relaxes economic policies that benefit them, not the lower middle class.

These policies in terms of taxation can be in the form of cutting profit taxes, reducing corporate income tax (PPh), reducing individual tax rates for the rich, and easing business regulations and tax incentives that benefit the upper class or capital owners.

If we look at Indonesia, the trickle down effect was first carried out in the government of President Soeharto in carrying out its economic development strategy. Since that time, economic, social and political development has been centered in Java, especially Jakarta, which is expected to have an effect on the economy of other regions.

However, in the era of President Jokowi’s administration, economic development is no longer Java-centric but Indonesia-centric, that is, developing the economy is no longer centered in Java but evenly distributed throughout Indonesia. The government began to carry out a people’s economy by boosting small industries and running the economy from the bottom up or commonly referred to as bottom-up or people’s economy.

Incentives related to the Trickle Down Effect

The government has also provided tax incentives for the upper class community, namely the existence of tax amnesty which is regulated in Law Number 11 of 2016 concerning Tax Amnesty. Tax amnesty is the abolition of taxes that should be owed, not subject to tax administration sanctions or fines and criminal witnesses in the field of taxation by paying a ransom and reporting assets.

The government has also reduced the Article 25 income tax installments for entrepreneurs affected by the Covid-19 pandemic. Through the Minister of Finance Regulation (PMK) Number 82/PMK.03/2021, the government has extended the provision of tax incentives for the impact of Covid-19 in the form of reducing the installments of Article 29 Income Tax for affected taxpayers until December 2021. Number of Classifications of Business Fields (KLU) that can be obtained take advantage of the extension of the incentive to reduce PPh 25 installments less than before.

In addition, the most important thing is the existence of an omnibus law which is an investment-friendly policy. The omnibus law can resolve overlapping regulations and become the key to Indonesia’s economic growth by providing business leeway for entrepreneurs and cutting bureaucracy. With this regulation, it is hoped that it will absorb a lot of our workforce.

Trickle Down Effect critique

This concept highly upholds the ease of investing and doing business, because it cannot be denied that investment is one of the drivers of economic growth. However, ignoring the role of consumption is a mistake. It’s like building more factories, but no one buys production from those factories.

Consumption is a very strategic sector and a guarantee to ensure that the wheels of the economy in this country continue to run. That is why the government is trying desperately to maintain people’s purchasing power so that household consumption can continue to be supported. Their consumption is the reason why businesses increase production.

The trickle down effect can increase the Gini coefficient or Gini ratio. The concept only benefits the rich few, making them richer. It puts more money in the hands of the rich and corporations, encouraging spending and free market capitalism. In contrast, those on low incomes do not receive tax cuts. This situation widens income and wealth inequality.

In addition, tax cuts are more beneficial if they target the lower middle class. They cover a large part of the population. Thus, when they have more money because of lower taxes, they will increase the demand for goods and services. That encourages businesses to increase production and create more jobs and income. Thus, the scale of the impact of tax cuts is more significant.

People’s Economy

People’s economy was first introduced by Mohammad Hatta. This concept is the antithesis of the trickle down effect, which is an economic concept that focuses its development on the people. Ma’ruf Amin in his book The Ma’ruf Amin Way said the trickle down effect created economic inequality in Indonesia, so he encouraged the implementation of a people’s economy.

There are many tax incentives carried out by the government in order to help the lower middle class people. One of them is tax incentives in the National Economic Recovery (PEN) program in this Covid-19 pandemic situation. The government decided to extend the tax incentive policy in the 2021 PEN program.

This policy is contained in PMK Number 9/PMK.03/2021 concerning Tax Incentives for Taxpayers Affected by the Corona Virus Disease 2019 Pandemic and is valid until June 30, 2021. This incentive will encourage people’s purchasing power and provide stimulus to the public to maintain their consumption. Because with consumption, economic recovery is faster to do.

The Directorate General of Taxes noted that the realization of tax incentives in the 2021 PEN program until April 20 was Rp26.19 trillion. This figure is equivalent to 44.79% of the total budget ceiling of Rp. 58.47 trillion. The amount of this realization is a calculation from the January to March 2021 tax period.

Conclusion

People’s economy is an economic system that is expected to be enforced in Indonesia so that benefits are obtained for all, not only for one party. People’s economy stipulates that important production that controls the lives of many people must be controlled by the state and not fall into the hands of someone in power, causing oligarchy and people’s oppression.

The people’s economy and the trickle down effect will have a good impact on our economy if it is done fairly. Because actually in building the economy of a country, it is not only top-down, but bottom-up is no less important. The most important thing is that we carry out an economic system that is based on the interests of the people and can stand on its own feet in any sector.