Understanding the Impact of FDI, Government Spending, and Inflation on Local Tax Ratio: The Role of Corruption in Indonesia
DOI:
https://doi.org/10.33395/owner.v10i2.3137Abstract
This study analyzes the effects of Foreign Direct Investment (FDI), government expenditure, and inflation on the local tax ratio in Indonesia, while examining whether corruption conditions these relationships. The local tax ratio is employed as a partial indicator of local tax effort, reflecting the effectiveness of subnational governments in mobilizing locally assigned tax revenues within the institutional constraints of fiscal decentralization. Using balanced panel data from 33 Indonesian provinces over the period 2015–2024, the study applies a moderated regression analysis (MRA) to estimate both direct and interaction effects. The results indicate that government expenditure has a positive and statistically significant effect on the local tax ratio, whereas inflation exerts a significant negative effect. The effect of FDI is positive in baseline estimations but loses statistical significance after accounting for institutional interactions. Further analysis shows that corruption significantly moderates the relationship between government expenditure and the local tax ratio by weakening its positive fiscal impact, while its moderating effects on the relationships involving FDI and inflation are not statistically significant. These findings suggest that improvements in governance quality and public financial management are essential to enhance the effectiveness of public spending in strengthening local tax ratio, while also highlighting the structural limitations faced by local governments in translating investment and macroeconomic conditions into higher tax revenues.
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