Tax Day: Why Fiscal Sovereignty Matters
Every nation has important moments that shape its historical journey. For Indonesia, 17 August 1945 became the milestone for the birth of political independence. However, not many know that just a few weeks earlier, there was another historic event no less important.
On 14 July 1945, during the final stages of drafting the 1945 Constitution, the Constitution Drafting Committee submitted the second draft of Indonesia’s constitution. The draft contained the provision that “All taxes for state purposes shall be based on Law.”
This provision was a development of the proposal by the Chairman of BPUPKI, Dr. K.R.T. Radjiman Wedyodiningrat—whose name is now immortalised as the name of the Main Building of the Directorate General of Taxes (DJP) Head Office—that tax collection must be regulated by law. This was the first constitutional recognition that taxation is one of the foundations of the Indonesian state that was soon to be born, even before the Proclamation of Independence was declared.
This historic event conveys a very strong message. Long before Indonesia became independent, the nation’s founders had realised that political sovereignty would never be complete without fiscal sovereignty. A truly independent country must be able to finance its development and governance with its own resources collected based on law.
Therefore, since 2017, Indonesia has commemorated every 14 July as Tax Day. Tax Day is not merely a commemoration for the Directorate General of Taxes or the Ministry of Finance. Tax Day is a reminder that taxation has been part of Indonesia’s constitutional vision even before this Republic officially stood. Almost eight decades later, that vision feels increasingly relevant.
Every day, Indonesian society enjoys various public services financed by taxes. Highways connect cities and villages, schools educate the nation’s next generation, hospitals provide health services, and social protection programmes assist vulnerable community groups. Public infrastructure and various other government services largely depend on tax revenue. Behind all these services, there are millions of taxpayers whose contributions help sustain the wheels of national development.
However, Indonesia currently faces increasingly large fiscal challenges due to ever-growing development needs. Infrastructure requires sustainable investment, the education and health sectors need increasingly larger budgets, and social protection programmes continue to expand.
At the same time, the government is also running various priority programmes, such as Free Nutritious Meals (MBG), strengthening the village economy through the Merah Putih Village Cooperatives, improving food security, and expanding access to education. If implemented effectively, all these programmes represent an extraordinary investment for Indonesia’s future. The issue is not whether these programmes are important, but rather how to finance them sustainably.
The easiest response is usually to increase tax revenue. However, the reality is not that simple. Former Minister of Finance, Chatib Basri, recently joked that a finance minister’s job is actually quite simple: to increase revenue, reduce expenditure, and cut budgets selectively.
This statement remains relevant because it describes the essence of fiscal policy. Yet, current economic conditions also remind us that increasing state revenue is no longer as easy as raising tax rates. Slowing economic growth, increasingly fierce global competition to attract investment, and a business world facing great uncertainty pose their own challenges for a struggling society. In such a situation, increasing state revenue cannot solely depend on raising tax rates.
The more fundamental challenge actually lies in tax capacity. Various studies by the International Monetary Fund (IMF, 2025), along with research by economists Timothy Besley and Torsten Persson (2009), show that countries do not succeed in increasing revenue simply by imposing higher tax rates. Countries are able to collect greater revenue precisely because they have stronger fiscal capacity and institutional capacity.
In other words, Indonesia’s current challenge is not merely how to collect more taxes, but rather how to strengthen tax capacity itself. This capacity cannot be built overnight. It is the result of long-term investment in institutional systems, technology, human resources, legal certainty, and public trust.
Tax capacity is the state’s ability to identify taxpayers, monitor economic activity, manage tax administration efficiently, and enforce compliance fairly (World Bank, 2025). No less important is tax morale, namely the willingness of the public to pay taxes because they believe the tax system operates fairly and tax money is managed responsibly (OECD, 2019). These two aspects reinforce each other.
Countries with strong institutions are generally able to collect higher revenue not because they have very high tax rates, but because the public trusts their tax system and the government has the capacity to manage it effectively. Perhaps this is the most important lesson to be drawn from Tax Day.
Building tax capacity is not the sole responsibility of the Directorate General of Taxes. When tax revenue misses its target, public attention is almost always directed at the DJP. In reality, modern tax administration is highly dependent on information, much of which lies outside the tax authority’s purview. Banks hold financial transaction data.