More progressive tax rates

More progressive tax rates

Calls for steeper progression in income and property tax rates
dominated the views of private-sector economists and tax consultants at
a one-day seminar on tax reform at the IBI Business School here on
Wednesday. Given the 1980s trend in which many governments drastically
reduced the progression of income taxation and focused on broadening the
tax base, the recommendations, given as input for the tax
bills currently being finalized by the finance ministry, seemed rather
strange.

But as noted economist Kwik Kian Gie argued at the seminar, the
present tax brackets are quite unfair, especially for middle-income
people. The 1983 Income Tax Law, which came into force in 1984, applies
a rate of 15 percent to taxable income of up to Rp 10 million
(US$4,650), 25 percent to incomes of more than Rp 10 million and up to
Rp 50 million and 35 percent to those exceeding Rp 50 million. The rates
are applied to both individual and corporate incomes.

Obviously, more thorough studies are needed to examine the pros and
cons of increasing the tax burdens of high-income taxpayers. One of the
arguments against high rates is that a high level of progression
undermines taxpayers' work efforts and savings and may encourage tax
avoidance and evasion. This argument seems to merit thorough
examination, especially with regard to our tax system which is still
quite inefficient and to our tax administration which requires many
improvements.

Obviously, besides increasing government receipts, raising the rates
of tax on high income people also has the objective of enhancing equity.
The question now is whether it is better to redistribute income through
the expenditure side or through the income tax system. This is something
the political leaders will have to decide.

The seminar also touched upon the need to raise the property tax
rate. This also deserves more attention because the property tax
receipts at present -- for the current fiscal year envisaged at only Rp
1.6 trillion -- are seen by many analysts as way below the potential tax
capacity. The tax receipts are indeed rather small because the property
tax, when it was enforced in 1985, amalgamated the old wealth, road and
household taxes.

The government cannot change the present property tax rate of 0.5
percent of the taxable value of properties without amending the Property
Tax Law, a process which naturally takes a lot of time. What the
government can do immediately is to raise the taxable value of
properties which the law sets at a minimum 20 percent of the market
value. That is what the government did recently by doubling the taxable
value of houses whose market prices exceed Rp 1 billion.

A well-designed and successfully administered property tax is usually
an efficient way to tax the well-off. It is therefore encouraging to
note that the government is now giving more attention to periodical
revaluation of the market value of houses, notably those in the rapidly
growing urban centers where property prices usually tend to rise
steadily at steep rates.

The pluses and minuses of the various ideas aired with regard to the
new tax reform package being prepared by the government to replace the
10-year old tax laws need more thorough review before the various
recommendations can be accommodated in the final bills to be submitted
to the House of Representatives. But for sure, the new tax laws should
be formulated in such a way that they will not only raise tax receipts
to enhance our financing self-reliance, but also broaden the tax base
and promote equity.