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.