Page 3 - Working Paper (Asymmetric Information & Its Impact On Tax Compliance Cost In Indonesia)
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DDTC Working Paper 0113  DDTC Working Paper 0113

                   1. Introduction                                  above, this article will attempt to study the subject
                                                                    on asymmetric information and  its impact  on
                      In conforming with government requirements    compliance cost, thereby focusing on a conceptual
                   for compliance with tax laws, businesses are at least   approach and its relationship with current tax
                   faced  with  the  following  kinds  of  expenditures:   developments in Indonesia.
                   (i)  the  sacrifice  of  income  from  the  payment
                                                                      Figure 1 - Regulation, asymmetric information and
                   of  the  tax  itself;  (ii)  distortion  costs,  which  are      compliance cost
                   costs that arises from changes in the supply and
                   demand of products due to taxes, which  in turn
                   alter  the  pattern  of  economic  behavior;  and  (iii)   Regulation  ASymmETRIC INFORmATION
                   tax operating cost, which are the resources needed
                   to take up  in  operating  the  tax  system in  order
                   to comply with tax  regulations. From business
                   perspective, tax operating  cost is  considered  as
                   compliance cost. 2                                                         Compliance Cost

                      The theory regarding compliance  cost and
                   its  impact  on  taxation  was  first  introduced  by
                   Sandford  (1973).  According  Sanford,  compliance
                   costs  and other  administrative expenditures  are
                                                                                              Tax Revenue and
                   considered  as  the  hidden  cost  of  taxation.  Since                   Economic Activities
                   then, various studies have been conducted, which
                                                                    2.  Theory  of  asymmetric  information
                   acknowledge  compliance  cost  as  an  important
                                                                    and compliance cost
                   variable for increasing the level of compliance of
                                                                       2.1.  Asymmetric Information
                      Most  of  these  studies  only  clarifies  that  a
                   complexity of a tax system has a direct relationship
                                                                       Asymmetric information is one of the important
                   with compliance cost. Yet, there is no further study
                                                                    branches  in the discipline  of  microeconomics,
                   on the  subject regarding the level of  impact that
                                                                    which clarifies the behavior patterns of actors in
                   a  complexity  of a  tax  system has on compliance
                                                                    a transaction in the situation where there is  an
                   cost, especially in Indonesia. For instance, whether
                                                                    imbalance  of information that  could potentially
                   a simple tax  system would automatically result
                                                                    result in a market failure. The theory on the subject
                   in  a  decrease of compliance  cost or the  other
                                                                    was  first  introduced  by  George  Akerlof  (1970),
                   way  around?  Surely  the  answer  to  this  question
                                                                    through his paper titled “The Market for Lemons:
                   could be found  if  also the behavior  pattern  of
                                                                    Quality,  Uncertainty  and  the  Market  Mechanism”.
                   stakeholders in a tax system is known.  This is what
                                                                    Joseph  Stiglitz  and  Michael  Spence  further
                   has been lacking on the research  on compliance                     3
                                                                    developed the theory.  The theory of asymmetrical
                   cost, particularly in Indonesia.
                                                                    information has been applied in various contexts
                                                                    and  cases,  such  as:  stock  markets,  insurance,
                      In the author’s opinion, the missing  link
                                                                    investment decisions by companies and others.
                   between the relationship  of compliance  cost and
                   the complexity of a  tax  system starts from the
                                                                       Normally,  an  agreement  or  a  written  contract
                   situation of asymmetric information (see Figure 1).
                                                                    could  reduce losses that  could  arise from
                   Simply put, asymmetric information is a situation
                                                                    asymmetric information. Ideally, a contract should
                   where one party has more or  better  information
                                                                    become a solution for each party in the transaction
                   than the other party, while negotiating a contract
                                                                    to optimally satisfy each party in the transaction
                   to a transaction. In such a situation one of the party
                                                                    in accordance with their expectations. In order to
                   will  lack  the ability to observe the other  party’s
                                                                    so,  a  contract  should  at  least  fulfill  the  following
                   actions and preference, thus creating an imbalance
                                                                    requirements: (i) the contract should be feasible;
                   of power in transactions.
                                                                    (ii) the contract should produce an outcome that is
                                                                    deemed rational for each party; (iii) every measure
                      Up to date, there is lack of comprehensive data
                                                                    agreed  in the contract  should give an  incentive
                   to study the level of compliance cost in Indonesia,
                   especially when the subject is connected with the
                   issue  of  asymmetric  information.  Despite  of  the   3 Both authors have contributed in the clarification of behavior patterns
                                                                    of  economic agents  in  an  Asymmetric Information situation.  Stiglitz
                                                                    pioneered the theory of “screening”. In this way, the under informed party
                   2 Cedric Sandford, “General Report: Administrative and Tax Compliance   can induce the other party to reveal their information. While Spence,
                   Costs of  Taxation”,  in Administrative and  Tax  Compliance Costs of   introduced the idea of “signaling”, where in a situation of Asymmetric
                   Taxation (Editor: Cedric Sandford), Kluwer Law and Taxation Publishers,   Information it is possible for people to signal their type, thus believable
                   1989, p. 20.                                     transferring information to the other party and resolving the asymmetry.
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