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