Assessing the benefits of flat tax on businesses<\/p>\n
Agam Fatchurrochman, Nottingham, UK<\/p>\n
Today's hot topic in the business community is that the
\ngovernment is getting ready to revise the tax laws of 2000,
\nparticularly regarding the proposal for applying a flat tax rate
\nto provide business and fiscal incentives for public companies.<\/p>\n
The flat rate, as proposed, would be set at 30 percent while
\npublic companies would be taxed at 20 percent to 25 percent.<\/p>\n
However, the flat tax proposal is still receiving mixed
\nresponses. Some positively accept the proposal, citing the tax
\nsimplicity, but others argue that the scheme is not sufficient to
\ncope with the tax simplification objective and global tax
\ncompetition.<\/p>\n
The main feature of a sound flat tax system is simplicity, by
\nremoving all kinds of relief and allowances, thus creating a
\nsimple system of taking total revenue and subtracting three kinds
\nof payments, purchases of inputs, wages and pensions, as well as
\nplant and equipment expenditures.<\/p>\n
By simplifying tax procedures, the transaction costs, which
\nare quite significant in collecting tax, can be reduced. By
\neliminating allowances and fiscal incentives, the flat tax gets
\nrid of all tax lobbyists, negotiation and extortion and the
\nbureaucrats needed to interpret them.<\/p>\n
The second feature is to provide an investment-friendly
\nclimate for domestic and foreign investors. Combined with a lower
\ntax rate, the scheme then encourages capital formation and
\nproductive activities.<\/p>\n
The third feature is lowering the opportunity costs for
\navoiding taxes. Under a flat tax, business is less willing to
\ncheat and risk being audited by the tax office. In addition, the
\ngovernment spends less money on monitoring and auditing in a
\nsimpler fiscal system.<\/p>\n
In a global economy in which investors freely move across
\ncountry borders, a simple fiscal system attracts global
\nbusinesses. In turn, foreign investments further boost an economy
\nwith a simple, efficient fiscal system. As a result of a more
\ndynamic economy and less tax evasion, the government actually
\ncollects more revenue.<\/p>\n
One of the most cited examples is in Ireland, although not
\nfully applying a flat tax, it has slashed its corporate tax rate
\nfrom 50 percent to 12.5 percent. Combined with other tax cuts,
\nthis helped turn the \"sick man of Europe\" into the \"Celtic Tiger\"
\nwith unemployment rates dropping from 17 percent a decade ago to
\n5 percent.<\/p>\n
Flat tax is gaining popularity among small and open economies.
\nBut even such big countries as Russia have dumped the progressive
\ntax system and replaced it with a 13 percent flat tax. This new
\nsystem took effect in 2001 and already has boosted economic
\ngrowth and tax compliance.<\/p>\n
Subsequent tax reforms after 1984 have created a more complex
\ntax system in Indonesia, and therefore a lot of room for
\ninterpretation and extortion, by reintroducing many concessions,
\nwhich had been revoked in the 1984 reform.<\/p>\n
Coupled with corrupt tax auditors, businesses bear the high
\ncompliance costs, which are the value of resources expended by
\ntaxpayers in meeting their tax obligations, such as costs of
\nmaintaining tax records, hiring tax consultants and, in the case
\nof Indonesia, costs for servicing corrupt tax auditors.<\/p>\n
Therefore, the introduction of a flat tax scheme is turning
\nthe time back to the original tax reform.<\/p>\n
Although the proposal for a flat tax rate has not been fully
\nrevealed yet, there are several features at least, which should
\nbe considered so as to fully utilize the flat tax features.<\/p>\n
First, the proposed rate of 30 percent is considered too high
\ncompared to neighboring countries. For example, Malaysia and
\nVietnam are taxing business at 28 percent, Singapore at 25
\npercent and Hong Kong at a 16 percent flat tax.<\/p>\n
It is obvious that the fiscal regime is not the sole feature
\nof an investment-friendly economy. But with the lack of
\ninfrastructure, an unskilled workforce and a corrupt bureaucracy,
\nthe proposed rate might jeopardize our efforts to attract more
\nforeign direct investment.<\/p>\n
Furthermore, to cope with regional tax competition, the
\ngovernment might be forced to provide various fiscal incentives
\nand obviously this will destroy the spirit of simplicity.<\/p>\n
Second, the proposed rate of 30 percent appears to be just a
\nway to remove the existing marginal rates (10 percent, 15 percent
\nand 30 percent) and settling on the maximum rate, but the rest of
\nthe system remains intact. That proposal would maintain all tax
\nrelief rules, and so allowances and concessions would still by
\nexpected from lobbyists. Consequently, business still has to bear
\nthe high costs of compliance<\/p>\n
Third, under a flat tax with a high rate and a complex system,
\nthere is still an incentive for evading the system. This, in
\nturn, will compel the government to maintain high administrative
\ncosts of tax collection for monitoring and auditing taxpayers.<\/p>\n
The next tax reform has to be designed to reduce the
\ntransaction costs of transferring resources to the public sector,
\nthat is, reducing the scope for corruption in tax collection. But
\nalthough the tax system can be redesigned in ways that hamper
\ncorruption, still no purely technical redesign can wholly
\neliminate collusion.<\/p>\n
Switching from a progressive fiscal system to the flat tax is
\na very radical reform and has to be carefully managed. By
\nconforming to the basic features of a flat tax, lower rates and
\nsimplicity, it is expected that we can achieve economic
\nefficiency, and fairness in the tax collection. This in turn will
\nprovide a healthy fiscal environment required to advance the
\neconomy, by generating new business and attracting foreign
\ninvestment.<\/p>\n
The writer is studying at Nottingham University Business
\nSchool in Britain. He can be reached at lixaf2@nottingham.ac.uk<\/p>",
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