Moral hazards of a tax amnesty

Moral hazards of a tax amnesty

We are quite apprehensive about the real objective behind the
government's plan to grant a tax amnesty. While no further
developments have been heard regarding the long-awaited tax
administrative reform, the new government has revived the idea of
a tax amnesty, which had been banished by the previous
administration as economically unfeasible and a gross violation
of the people's sense of fairness.

Few technical details were immediately available about the
planned amnesty, which has yet to be formulated into a bill for
approval by the House of Representatives. Nevertheless, the mere
plan to include a tax amnesty in the priority agenda of the new
government has raised eyebrows, especially because Aburizal
Bakrie, the chief economics minister in President Susilo Bambang
Yudhoyono's Cabinet, is a former chairman of the Indonesian
Chamber of Commerce and Industry (Kadin).

Kadin has been promoting the idea of a tax amnesty since last
year as part of its comprehensive tax reform proposal to the
government. The group has argued that such a facility is
necessary to broaden the tax base and lure back billions of
dollars parked overseas by Indonesian conglomerates during the
height of the economic crisis in 1998.

True, the cash-strapped government is desperate for new
private investment to reinvigorate the economy and to broaden the
tax base and increase tax revenue. The number of registered
personal income taxpayers is still less than 1 percent of the
total population.

Moreover, tax evasion is pervasive, as can be seen from the
low tax ratio (tax receipts against gross domestic product) of
less than 13 percent. And similar programs in many countries have
shown that a well-administered tax amnesty can bring millions of
individuals and businesses onto the tax rolls for the first time.

However, the situation in Indonesia is not conducive for the
implementation of such a facility. Given the utterly corrupt and
inefficient tax administration, granting an indiscriminate tax
amnesty now would mostly benefit the big conglomerates whose
bankrupt banks and companies previously cost taxpayers about the
equivalent of US$75 billion.

If a tax amnesty is the only incentive that will encourage
these conglomerates to bring back their funds from overseas, it
is not worth the government's time to woo back such skittish
investors. They already demonstrated their lack of faith in the
country by transferring their money overseas.

It would be a grave insult to the public's sense of justice if
these same debtor conglomerates, which have been able to
reacquire their assets at less than 30 percent of their original
value, were allowed to enjoy such a generous tax relief.

There is nonetheless a real need for a tax amnesty, but on a
strictly selective basis, granted mainly to small and medium-
sized businesses to encourage them to go legitimate, and to net
taxpayers who in the past chose to evade their taxes because the
corrupt tax administration made this much simpler and cheaper
than registering as taxpayers.

A tax amnesty is supposed to encourage people and firms to
register as taxpayers without fear of prosecution for past tax
debts.

But granting a tax amnesty without first establishing a strong
tax administration would only cause moral hazards as people,
expecting another amnesty in the future, would lower their tax
compliance and honest taxpayers would be discouraged from
continuing their voluntary compliance.

An indiscriminate tax amnesty would also hurt the people's
sense of justice, especially if the facility was put in place
early next year at the same time the government was raising fuel
prices.

A strong and efficient tax administration is a prerequisite
for making a tax amnesty effective in achieving its main
objectives, because the tax amnesty period should be followed
immediately by strong low enforcement against tax evaders and
cheaters.

An effective tax administration will be able to send the
message that the tax amnesty is a one-time deal, a one-time
opportunity to make up for past mistakes, and that in the future
all tax evaders will be punished.

The government should therefore give top priority to the
completion of bills on income tax, value added tax and the
general rules and procedures of taxation before granting any tax
amnesty.