Tax the richest, why not? – Editorial
Editorial Board (The Jakarta Post)
Mon June 14, 2021
Families earning more than 5 billion rupees (US $ 357,000) in annual net income may soon be subject to a personal income tax (IRP) of 35% if a section of a tax bill under deliberation in the House of Representatives comes into force.
The revised IRP rate is one of the bill’s six major tax reforms aimed at increasing state revenue, as the government is legally obliged to reduce the budget deficit by about 6% of gross domestic product. (GDP) last year to a maximum of 3%. by 2023. According to analysts at Bahana Securities, this will require the government to reduce the budget deficit from 956 trillion rupees last year to 543 trillion rupees by 2023 and increase tax revenues by 353 trillion rupees per year within three years.
Even at 35 percent, Indonesia’s highest PPI rate would still be among the lowest in the world, compared to 45 to 55 percent in Europe, 56 percent in Japan and 42.75 percent in India. No wonder 90 percent of IRP revenue in Indonesia comes from wages or workers and only 10 percent is provided by non-employees, including wealthy people such as businessmen and highly skilled professionals. .
Right now, our highest four-tier PIT rate is 30 percent, taxed on annual net income of over Rs 500 million. Given our per capita income of just $ 4,000, the 35% tax rate will only apply to the top 1% of families in the country, which according to Credit Suisse’s Global Wealth Report 2019, represent 45% of the country’s household wealth. The country has no wealth or inheritance taxes.
Most studies have concluded – and the government has acknowledged this – that tax revenues in Indonesia, which represent only around 11% of GDP, are the lowest in the Group of 20 countries and lag behind emerging markets. and ASEAN peers. The tax rate even fell to less than 9 percent last year due to the economic contraction of 2.2 percent.
The biggest challenge is how to design a wealth tax with a simple and easy to administer mechanism, as wealth and assets need to be measured and their value updated regularly. Unfortunately, our tax administration system is known to be inefficient and complex, with many exemptions and loopholes for discretionary measures by tax officials.
However, with better design and comprehensive IT-based tax administration reform, as foreseen in the bill, a wealth tax could still be introduced. It is time for the government to close many of the tax loopholes that allow wealthier families to pass on property and financial assets to their heirs without either party paying tax on the appreciation in their value.
We believe that the risk of capital outflow in response to the increase in income tax could be mitigated, as Indonesia is a signatory of the Global Automatic Exchange of Information on Tax Matters, making more difficult to conceal assets in the country and abroad.