Hiking taxes may be catastrophic<\/p>\n
By Christopher Lingle<\/p>\n
UBUD, Bali (JP): Like many other governments in crisis-torn
\nEast Asia, the Indonesian government is struggling under the
\nweight of large budget deficits. In searching for ways to reduce
\nthe shortfall in public sector revenues, the government has
\nannounced plans to plug part of the hole in its finances by
\nraising taxes.<\/p>\n
Unfortunately, raising taxes during a recession might be the
\nworst possible solution for restoring balance to the public
\ntreasury. If this is a response to demands by the IMF and World
\nBank, hiking taxes might be more catastrophic than meeting the
\nconditionality requirements set by international institutions
\nafter the onset of the crisis. It is hard to imagine a worse
\ncourse of action than raising taxes when unemployment is rising
\nand economic growth is slowing.<\/p>\n
Consider the political costs and economic consequences from
\nincreasing the overall tax burden. The political ramifications
\nfor Indonesia might be substantial given the prevalence of wasted
\nresources and misdirected public funds due to KKN. If more money
\nis taken and squandered, outrages among an informed citizenry
\nmight spark a tax revolt.<\/p>\n
In the case of Japan, the imposition of a consumption tax is
\nwidely viewed as the final straw that brought on the current
\nrecession by reinforcing negative forces in its economy. And in
\nthe US, an economic slowdown brought about by higher levies cost
\nGeorge Bush his re-election bid when he broke his famous \"no new
\ntaxes\" pledge.<\/p>\n
Yet now, authorities in Jakarta have announced plans to
\nincrease taxes on some specific commodities (cement, tires and
\nsoft drinks) that is expected to yield about Rp 2 trillion, about
\nUS$2.75 billion. To their credit, the targets for higher taxes
\nwere selected with the aim to minimize collateral damage to the
\nrest of the economy. There is also some discussion about raising
\nimport duties on sugar from the current level of 25 percent,
\nalbeit the motivation mostly reflects protectionist instincts
\nrather than revenue generation.<\/p>\n
There are many better ways to reduce public-sector budget
\ndeficits that could provide larger amounts of funds more quickly
\nor outflows could be reduced. On the one hand, improving
\ncollection procedures to reduce leakages due to tax evasion can
\ngenerate additional funds.<\/p>\n
On the other hand, increasing efficiency and reducing
\nmismanagement of state companies could lighten the burden on the
\nstate treasury. A concerted effort to halt unnecessary
\nexpenditures on government schemes would be highly beneficial.<\/p>\n
In all events, the amount raised by the proposed new taxes is
\ntrivial compared to losses registered by state-owned companies
\narising from mismanagement. For example, the state electricity
\ncompany is expected to lose almost Rp 14 trillion in the coming
\nfiscal year. Additionally, there are reports of billions of
\ndollars in losses by major state companies such as Pertamina
\nbecause of poor management. And then there are enormous amounts
\nof government revenues lost to theft and fraud as indicated by
\nthe siphoning off of as much as Rp 784 billion of funds that were
\navailable for reforestation.<\/p>\n
Rapid steps could be taken to privatize state-owned assets
\nalong with a more concerted effort to sell off distressed assets
\nheld by IBRA. Besides the immediate injection of funds from
\nsales, the conversion to private enterprises will result in them
\nbecoming net taxpayers rather than being a drain on government
\nfinancial resources.<\/p>\n
Another improvement would arise from increasing user fees and
\nprices of goods sold by state enterprises. Note that such steps
\ncan actually decrease the overall tax burden. Reductions in
\npublic subsidies should bring down the amount of tax revenues
\nrequired for government operations.<\/p>\n
Even more important, is that gains would occur even if direct
\nincome transfers to poorer families were made in amounts that
\nexactly offset subsidies that might have been paid to
\nunprofitable state firms. Payments to the financially weakest
\nsector of the community would shield them from increased prices
\nand so minimize political opposition to such a plan.<\/p>\n
Net gains from increased efficiency that would lessen the
\nburden on the environment because of more prudent use of natural
\nand human resources. This is because higher prices for previously
\nsubsidized goods or services would encourage households and
\nbusinesses to choose more economically. When governments fix
\nartificially low prices, distortions are shifted to other sectors
\nof the economy. Removal of subsidies on electricity or petrol
\nwill benefit the environment by inducing conservation. Consumers
\nwill choose more sensible usage given their budgetary
\nconstraints.<\/p>\n
The decision to rely upon higher taxes for deficit reduction
\nindicates an outmoded mindset. Perhaps things might be different
\nif political choices were made solely on the basis of equity and
\nfairness or service to the community. Few citizens in Indonesia
\nor the rest of Asia believe that story.<\/p>\n
A superior approach to reducing public sector deficits is to
\nrely upon restoring economic growth that will bring about revenue
\nincreases without imposing new taxes or increasing rates on
\nexisting levies. Globalization has revealed that high economic
\ngrowth is a matter of choice for policy makers.<\/p>\n
Governments must take the initiative to implement policies and
\nsupport institutional arrangement that provide incentives for
\nprivate entrepreneurs to undertake risks. In the end, only
\nprivate sector actions can provide a sustainable source of job
\nopportunities and additional wealth for a community. It is time
\nto unleash more of these forces and allow greater scope for
\nmarket transactions. In so doing, entrepreneurs can better
\ndiscover what their fellow citizens most want to have and on the
\nbasis of those prices they will be willing to pay.<\/p>\n
Raising taxes will only place more money into a system that
\nseems to be irredeemably tainted by mismanagement and corruption.
\nThe choice of which path will bring better results should be
\nclear.<\/p>\n
The writer is an independent corporate consultant and adjunct
\nscholar of the Centre for Independent Studies in Sydney. His e-
\nmail address is CLINGLE@ufm.edu.gt.<\/p>",
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