On tax on deposit interest

On tax on deposit interest

It is disappointing that The Jakarta Post has come out in
support of the government's proposal to raise the flat rate tax
on the interest on bank deposits from 15 percent to 20 percent
after only a very superficial analysis (Taxing interest incomes,
Jan. 10, 2001).

No economic logic justifies such a measure in the absence of
some progressivity in tax scales for "the big and small
depositors". To say that the administrative and collection
problems caused by such differentiation, in view of the limited
capacity of the tax office, would be too great is just not good
enough.

To give the economy a much needed boost requires a reduction
in the rate, if not a total elimination of the tax. Among other
things, the removal of the tax altogether would free up the
resources of the tax office for more productive uses, including
their reengagement to eliminate waste on the expenditure side of
the budget, which is, unfortunately, still commonplace. To name
but a few, we see reports of claims by the bureaucratic elite and
politicians for overseas travel, of extravagant spending by
government bodies and utter waste at many of the nation's
overseas posts. On this score alone, a "comparative study" of
expenditures by each of the country's representative offices
abroad from off-budget as well as budgetary sources would make
fascinating reading.

Intended or otherwise, the overall impact of the proposed flat
rate increase on bank deposit interest earnings would first be to
further reduce the volume of funds available for private
investment. With foreign funds now all but dried up this would be
quite tragic. In the hands of the government, the additional tax
proceeds would most likely be channeled into unproductive areas
and to help defray the costs of the utterly wasteful government
expenditures of the type already mentioned, and into areas where
internationally acceptable auditing procedures and standards are
almost nonexistent.

But just as importantly, the absence of a progressive tax
structure will have further negative consequences on private
consumption expenditures by households, by small business and the
larger firms struggling to survive -- the current engines of
Indonesia's economic growth and the sectors that have suffered so
harshly from the financial and political crises which have
plagued the nation since July 1997.

The movement of funds away from the banks to the share market,
as the Post predicts, is also unlikely to take place for the
reason that the patterns of behavior of these groups are markedly
different than those of the big depositors. For the smaller
people, not only is the share market not understood, but the risk
of losing all their savings is much, much greater.

Not only would the tax hike give rise to a misallocation of
resources, but the net impact of the increased tax on bank
deposit interest would work to reduce the nation's economic
growth below what it would otherwise have been if the status quo
had been held or the tax had been reduced or abolished.

HINDRATI

Jakarta