Time for tax justice in Indonesia Mickael B Hoelman  ;   A member of the Southeast Asian Tax Justice Network and program manager of the Tifa Foundation/Open Society Foundation Indonesia

JAKARTA POST, 17 September 2014

                                                                                                                       

                                                      

The victory of Joko “Jokowi” Widodo–Jusuf Kalla in the presidential election was met with euphoria, but the pair faces a narrow fiscal space to implement its Nawacita (nine programs) due to the burden of energy subsidies on our state budget and mobsters who undermine our fiscal capacity. Not only that, President Susilo Bambang Yudhoyono’s government has also underperformed in its attempts to reduce poverty. This failure has created a new challenge — widening inequality. During the last decade, inequality has increased drastically from 0.33 (2004) to 0.41 (2013 Gini Index). Economic growth and the free market mechanism have not been able to decrease inequality. The widening income gap is shown when the rich pay less, as is apparent in our tax structure. Despite stable economic growth, our tax revenues have never been optimal as reflected by the relatively low tax ratio of only 12 percent. The tax authorities said the current tax revenue was only 30–40 percent of its potential, which meant Indonesia could raise at least Rp 2,000 trillion (US$168 billion) in taxes. While other countries in the region increase their gross domestic product (GDP), Indonesia depends on corporate tax revenues and low personal income tax revenues. To some degree it might be common among emerging market economies, however, Indonesia raises less than a third of the revenues that other ASEAN countries do and also less than the 1.9 percent average of lower–middle income countries. In this structure, employees contribute far more than wealthy company owners or individual shareholders. In addition, the tax structure also relies on a regressive general consumption tax (80 percent). This condition has enabled the elite to control the tax structure, hindering redistribution and sustainable job creation. In short, the labor and middle classes are paying the tax burden. Hence, tax revenues make a tiny contribution to required social security such as universal health care systems, pension funds and others. In the long run, this trend will lead to the poor and middle labor classes subsidizing the rich and the super rich. The “salariat” will enter a precarious situation, where public services are underfunded and captured by the market mechanism. Then, it is a political question, not only an economic question. One route worth considering in solving the problem is through the tax justice mechanism. Tax justice may reduce disparities through the improved distribution of resources. Indonesia needs this to reform subsidies that the rich and super rich are benefitting from. Tax justice should have been a part of Jokowi’s so-called “Mental Revolution”. I hope Jokowi–Kalla can get out of doing business as usual. The future tax system should find a way to overcome inequality. First, the tax structure should consider a fairer system between the poor and the rich. Jokowi–JK must get the tax mix right. One item to consider is expanding the class of taxpayers (tax brackets) for the rich and the super rich (Rp 5-10 billion income/year), such as by 35 and 40 percent, respectively. A conservative estimation of tax revenues from this new tax bracket expansion may reach at least Rp 5 trillion annually or double that of the current contribution. Second, the next government should promote corporate tax accountability since assets are easily being hidden via certain loopholes. Jokowi–Kalla can learn from French President Francois Hollande who has dared to introduce restrictions on maximum tax payment policies by companies, which shall not exceed 5 percent of their gross income. Third, Jokowi–Kalla should start recalculating the tax gap. It has long been a public secret that low tax collection is mainly due to low awareness, compliance and understated reports. In response, the next government could reintroduce the Sunset Policy Phase II followed by the application of sanctions. Learning from previous experience, the application of the Sunset Policy in 2008 increased our tax ratio to above 11 percent. Meanwhile, efforts to strengthen the legal umbrella will give the Corruption Eradication Commission (KPK) access to tax manipulation committed by individuals or business entities. In addition, the separation of the tax court from the Finance Ministry will not only encourage the independence of the tax court but also a more open, honest and fair tax judiciary. Fourth, Jokowi–Kalla could also consider shock therapy through the asset investigation of tax reports from the rich and the super rich and a new tax for assets (wealthy taxes). On the other hand, the pair can increase target revenues from value added tax (VAT) on imported goods, mainly luxurious goods, with the imposition at least equal to domestic VAT. During the last 10 years, contributions from imported luxury goods have been too small, while in general only the rich and the super rich enjoy the luxury of imported products, such as luxury cars or yachts. Fifth, Jokowi–Kalla will also need to redouble the target of tax receipts from each regional tax office considering that current tax revenues nationwide are donated much more from regional Java, especially from Jakarta. If Jokowi–Kalla dares to take up all the above recommendations, then in the next five years, Indonesia will at least reach an increased tax revenue of between 3 and 5 percent of GDP (in line with peer countries). Taxes are not merely a matter of collecting revenues. It is also about spending them fairly. It is time to earmark tax revenues for our social security programs and public goods provisions. Jokowi–Kalla may introduce its first earmark for financing the so-called “Indonesian Health Card” and “Smart Card”. Later, this may be expanded to other objectives such as food security or public infrastructure. Indonesia used to heavily depend on oil and gas revenues until it shifted to personal income and consumption taxes. Along with that, it is now fair for citizens to ask where their tax money has been spent. The Yudhoyono government can claim that Indonesia has reached relatively high and stable economic growth, but this growth has been overshadowed by a lack of future investment. It is now the time for the next government to begin distributing the dividend of growth more equally for every single citizen. To ensure this, Jokowi–Kalla may consider establishing an independent state revenue agency directly supervised by the office of the new president. ●