Is Tax Amnesty the Only Option for the Government Today?
In this second year of Jokowi, the wails of the Government of Indonesia (GoI) to generate more tax revenue is getting louder. The targeted economic growth of 5.3 percent in 2016 can only be achieved as the GoI has an adequate financial capacity to finance the development. In doing so, GoI through the ministry of finance has to collect tax revenue as much as IDR1,360.1 trillion (74.6 percent from total revenue) this year. And it’s not easy. GoI has to really push hard to collect all possible taxes. Some huge amounts of them are maybe even not inside the country. Forget about the domestic tax base for now.
The government approximates that Indonesian rich people have shrouded 900 billion dollar abroad. One of the policy measures to reach the tax target is by implementing tax amnesty, at least that what the government attempts to do now, and the government estimates 8-15 billion dollar of additional revenue from this policy. What is tax amnesty? What does theory say about it? Should we, as a part of the society, agree with that policy? Are there any alternatives to this policy measure? I am going to briefly discuss those four questions in this short article.
What is tax amnesty? Roughly speaking, in this context, tax amnesty is an invitation to tax evaders to report their taxable wealth to the government—whether in Indonesia or overseas. The government might offer no penalties or lower tax rate or both to the tax evaders to persuade the tax evaders. In Indonesian case today, the GoI proposes to grant a special tax rate of 1-6 percent plus no criminal prosecution within a specific timeline. It is a very low rate compared to the top income tax rate in Indonesia, which is up to 30 percent. For the case of Indonesia, the goal is obvious: to raise revenue quickly in the short run.
What does theory say about it? A tax amnesty can be seen as a discriminatory instrument to improve the efficiency, but only if government’s commitment to enforcing tax law is credible. If there is a lack of credibility, tax amnesty will very likely weaken future tax revenue by inducing other tax evading behavior. People will wait and expect to have another tax amnesty in the future by evading the tax today. In other words, a tax amnesty provides a signal of inconsistency of the governments. Politically, a tax amnesty will induce other tax amnesties in the future. Thus, we have pros and cons now. Especially related to short-term (and maybe medium-term) versus long-term objectives.
In the short run, tax amnesty might increase the tax revenue this year and maybe for the few years later and promoting efficiency. It means that the government will have a relatively higher tax revenues compared to its potential. One empirical example is Italy’s Scudo Fiscale in 2001 which targeted undeclared assets and capital overseas as in the case of Indonesia. This policy lured back about 70 billion dollar of asset to Italy. However, it might not be the case in the long-run. One of numerous research is from Alm and Beck (1993). They show that Colorado amnesty 1985 does not have long-run impact on tax collection. Recent research from Bayer, Oberhofer, and Winner (2015) shows that the likelihood of amnesties is mainly driven by fiscal need and taxpayers’ expectations on future amnesties. In cases of developing countries, India, Mexico, and the Philippines implemented tax amenities several times. Nevertheless, most research point out that tax amnesty does not have a direct impact on tax compliance. When a taxpayer is comparing the benefits of evading the tax and the cost of being detected—given the same tax code, tax law enforcement, and tax administration—she will not change the decision to evade the tax in the long run.
So, is a tax amnesty good? It depends. It might be good in the short-run and might be not so good in the long run as we discuss above. However, tax amnesty will hurt fairness for sure as we grant privileges to the tax evaders. There are other alternatives to tax amnesty. The best panacea is to fix the main problem, i.e. a weak tax compliance that can be a result of many factors such as weak tax administration and weak tax law enforcement. In the case of Indonesia, we still have an opportunity to add more taxpayers to increase the revenue from domestic tax base. The data shows that less than 30 million people are registered in 2014 and only about 10 million of them file their annual tax returns in the same year. A tax amnesty may be one way but we do have other alternatives to increase revenue and improve tax compliance in the long run.
At this point, I would say that I agree with tax amnesty under certain circumstances, i.e. better future tax administration and tax law enforcement. Once we have a good tax administration and tax law enforcement, tax compliance will improve and tax revenue will sustainably increase in the future. A sufficient tax revenue stream is essential for development progress that should bring the society to a higher welfare level. If tax amnesty give a chance to the tax evaders to join the law-abiding and compliant society, and hopefully increase the tax base this year onwards, then tax amnesty is a good policy measure. The government does need much more money to achieve the targeted growth. As Benjamin Franklin wrote in his letter to Jean-Baptiste Leroy,”… in this world nothing can be said to be certain, except death and taxes”.
Alm, J., & Beck, W. (1993). Tax amnesties and compliance in the long run: A time series analysis. National Tax Journal, 53-60.
Bayer, R. C., Oberhofer, H., & Winner, H. (2015). The occurrence of tax amnesties: Theory and evidence. Journal of Public Economics, 125, 70-82.
Le Borgne, E., & Baer, K. (2008). Tax amnesties: theory, trends, and some alternatives. International Monetary Fund.
http://www.kemenkeu.go.id/apbn2016 (accessed April 26, 2016)