More progressive tax rates<\/p>\n
Calls for steeper progression in income and property tax rates
\ndominated the views of private-sector economists and tax consultants at
\na one-day seminar on tax reform at the IBI Business School here on
\nWednesday. Given the 1980s trend in which many governments drastically
\nreduced the progression of income taxation and focused on broadening the
\ntax base, the recommendations, given as input for the tax
\nbills currently being finalized by the finance ministry, seemed rather
\nstrange.<\/p>\n
But as noted economist Kwik Kian Gie argued at the seminar, the
\npresent tax brackets are quite unfair, especially for middle-income
\npeople. The 1983 Income Tax Law, which came into force in 1984, applies
\na rate of 15 percent to taxable income of up to Rp 10 million
\n(US$4,650), 25 percent to incomes of more than Rp 10 million and up to
\nRp 50 million and 35 percent to those exceeding Rp 50 million. The rates
\nare applied to both individual and corporate incomes.<\/p>\n
Obviously, more thorough studies are needed to examine the pros and
\ncons of increasing the tax burdens of high-income taxpayers. One of the
\narguments against high rates is that a high level of progression
\nundermines taxpayers' work efforts and savings and may encourage tax
\navoidance and evasion. This argument seems to merit thorough
\nexamination, especially with regard to our tax system which is still
\nquite inefficient and to our tax administration which requires many
\nimprovements.<\/p>\n
Obviously, besides increasing government receipts, raising the rates
\nof tax on high income people also has the objective of enhancing equity.
\nThe question now is whether it is better to redistribute income through
\nthe expenditure side or through the income tax system. This is something
\nthe political leaders will have to decide.<\/p>\n
The seminar also touched upon the need to raise the property tax
\nrate. This also deserves more attention because the property tax
\nreceipts at present -- for the current fiscal year envisaged at only Rp
\n1.6 trillion -- are seen by many analysts as way below the potential tax
\ncapacity. The tax receipts are indeed rather small because the property
\ntax, when it was enforced in 1985, amalgamated the old wealth, road and
\nhousehold taxes.<\/p>\n
The government cannot change the present property tax rate of 0.5
\npercent of the taxable value of properties without amending the Property
\nTax Law, a process which naturally takes a lot of time. What the
\ngovernment can do immediately is to raise the taxable value of
\nproperties which the law sets at a minimum 20 percent of the market
\nvalue. That is what the government did recently by doubling the taxable
\nvalue of houses whose market prices exceed Rp 1 billion.<\/p>\n
A well-designed and successfully administered property tax is usually
\nan efficient way to tax the well-off. It is therefore encouraging to
\nnote that the government is now giving more attention to periodical
\nrevaluation of the market value of houses, notably those in the rapidly
\ngrowing urban centers where property prices usually tend to rise
\nsteadily at steep rates.<\/p>\n
The pluses and minuses of the various ideas aired with regard to the
\nnew tax reform package being prepared by the government to replace the
\n10-year old tax laws need more thorough review before the various
\nrecommendations can be accommodated in the final bills to be submitted
\nto the House of Representatives. But for sure, the new tax laws should
\nbe formulated in such a way that they will not only raise tax receipts
\nto enhance our financing self-reliance, but also broaden the tax base
\nand promote equity.<\/p>",
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