10.Government Revenue: Taxation in Theory and Practice

1. 10.Government Revenue: Taxation in Theory and Practice

2. 10.1. Role of Tax in The Government and Economy • The Government has the right to collect taxes • Role and Function of Tax • Source of fund finance government activities and development • Instrument to manage national economy  fiscal policy, tariff policy, etc • Instrument to maintain economic fairness

3. 12.2. Types of Taxation • Taxes on earnings payroll tax • Taxes on individual income capital gain tax • Taxes on corporate income • Taxes on wealth property tax, estate (inheritance tax) • Taxes on consumption  sale tax, excise tax

4. 12.3. Desirable Characteristics of Any Tax System • Economic efficiency • Administrative simplicity • Flexibility • Political responsibility • Fairness

5. 12.4. Economic Efficiency • Tax system  should not distort, but promote economic efficiency • Behavioral effect of tax  all taxes affect behavior (reduce spending)  tax affects on such as work behavior, savings, and investment • Corrective tax e.g. pollution tax (raises government revenues, and improve economic efficiency)

6. 12.5. Administrative Simplicity • Tax system  ought to be easy, and relatively inexpensive • Factors affecting administrative cost of tax system required recording system complexity of the system

7. 12.6. Flexibility • Tax system  should allow easy adaptation to changed circumstances • Changes in economic conditions change in tax rates • Speed of adjustments automatic, or slow • Political constraints of adjusting rates

8. 14.7. Political responsibility • Taxes system  held accountable to the public  transparent

9. 12.8. Fairness • The tax system should be fair  treating those in similar circumstances similarly (horizontal equity)  imposing higher tax on those who can better bear the burden of taxation (vertical equity)

10. 12.9. Practice of Taxation in Indonesia

11. Introductory Notes • Tax as source of fund for national development • Increasing tax revenue to reduce dependence on overseas loan for funding national development • Tax revenues increases overtime, yet, still not sufficient • Tax evasion is common place

12. Types of Tax • Income Tax (PPh) • Value added tax (PPn) • Luxurious good tax (PPnBM) • Land and building tax (PBB) • Excise • Import duties • Export tax • Other kind taxes, such as pollution tax, retribution

13. Constraints to Increase Tax Revenues • Low average income per capita • Unemployment and poverty • Bad public awareness for paying tax • Corruption • Economic inequality • Tax administration system  expensive and lack in public accountability

14. 12.8. References (1) Gruber, Jonathan. 2005. Public Finance and Public Policy. New York: Worth Publishers. Chapter 18 Stiglitz, Joseph E. 2000. Economics of the Public Sector. New York, USA: W.W. Northon and Company. Chapter 17. Reksohadiprodjo, Sukanto. 2001. Ekonomi Publik. Yogyakarta: BPFE. Bab 8-12

15. 12.8. References (2) Badan Pendidikan dan Pelatihan Keuangan, Departemen Keuangan Rep. Indonesia. 2004. Dasar-Dasar Keuangan Publik. Jakarta: Badan Pendidikan dan Pelatihan Keuangan, Departemen Keuangan Rep. Indonesia. Bab 13-21.