Page 13 - Working Paper (Narrowing Tax Gap: Cross Countries Experience)
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DDTC Working Paper 0915

                   5. Conclusion and Policy                            average tax rates;
                   Recommendations                                  •   More frequent tax audits and heavier penalties

                                                                       for  tax  evasion  may  reduce  the  size  of  the
                      5.1.  Conclusion                                 shadow economy;
                                                                    •   Governments should put  more emphasis  on
                      This  paper  intends  to  analyze  the  different
                                                                       legalizing  certain  shadow  economy  activities,
                   between actual tax revenue and maximum predicted
                                                                       for example by liberalizing the labor market;
                   tax  collection  by  reviewing  previous papers
                   related to the topics. Most of developed countries,   •   Reforms  that  liberalize  regulations  and  make
                   especially those of OECD member countries, have a   the economy more competitive reduce the
                   high level of tax capacity followed by highest degree   incentives for corruption, and encourage firms
                   of  tax  effort.  Meanwhile,  countries  in  East  Asia   to  move from the shadow economy into  the
                   and Pacific stand at different level of tax capacity   official one;
                   and  effort.  Indonesia,  for  example,  is  still  at  low   •   Governments should put  emphasis on the
                   level  of  tax  ratio  (11.9  percent)  and  tax  capacity   rule of law and on the strict enforcement of a
                   (28  percent)  as  well  as  tax  effort  (47  percent).   minimum necessary  set of regulations,  rather
                   Commitment  from  government  to  enhance  tax      than on increasing the number of regulations.
                   policies  and improve tax  administrations added
                   with  comprehensive and collective enforcement      There should be a comprehensive measurement
                   measurement could be used as panacea  to the     to  tackle  revenue collection issues.   A necessary
                   lingering problems in tax collection.            condition  is  a clear government commitment.
                                                                    Specific to strategies, there are some ways for tax
                       Based on previous studies, we also review    administration to increase revenues, as follow:
                   papers  related  to  shadow  economy.  Shadow
                   economy tends to be larger in the countries that   •  More  strategic  and  risk-based  compliance
                   exercise:                                           management approach. A risk-based approach
                                                                       means focusing on increasing registration, filing
                   •  Ineffective   tax   system   combined   with     and auditing in high-risk (high tax potential but
                      unnecessary regulations by the governments;      low  compliance)  sectors  and  segments.  For
                   •   A  heavily  regulated economy  with  weak       example,  revenue performance can be lifted
                      administration;                                  significantly by focusing resources on improving
                                                                       voluntary filing and payment compliance levels
                   •   Rampant  collusion  and  corruption  due  to
                                                                       among large taxpayers,  where performance
                      pervasive administrative problems;
                                                                       significantly  lags  international  standards
                   •  High   unemployment   and   large  earlier
                                                                       (currently 50-60 percent versus more than 98
                                                                       percent in other countries).
                   •  Decline of trust towards public institutions.
                                                                    •   Continue improving capacity to analyze third-
                   •  It is also reflected in the fall of the number of   party  information (e.g.,  more  access to third-
                      labor market participation.                      party data, improve the design of National Tax
                                                                       Census, and enhance data and IT management),
                      In the case of Indonesia, the size of underground
                                                                       and coordination with other  stakeholders
                   economy measured by the currency demand
                                                                       especially  financial  service  authorities  (most
                   approach from the period  of  2000  to 2009  was
                                                                       immediate challenge).
                   about 5.04 percent of GDP with the potential tax
                                                                    •   Simplifying   tax   structures   and   greater
                   revenue of about IDR 18.86 trillion each year. 29
                                                                       dissemination of tax information. International
                      5.2.  Policy Recommendations                     experience shows that  increasing the level  of
                                                                       voluntary  compliance is a more cost-effective
                                                                       approach to compliance management  in the
                      The findings from previous studies on how to
                                                                       long-term. This requires providing services
                   alleviate shadow economy problems contain some
                                                                       such as call centers, mobile filing and payment
                   useful policy recommendations:
                                                                       options  to  assist  taxpayers  who  are willing
                                                                       to  comply but lack  capacity or  information
                   •  Reductions  in  tax  rates  will  not  substantially
                                                                       to  properly  fulfill  their  tax  obligations,  and
                      shrink the shadow economy, but they may be
                                                                       rewarding those taxpayers with high levels of
                      able to reduce it;
                                                                       voluntary compliance with lower costs of doing
                   •   Marginal tax rates are more relevant to people’s
                                                                       business. 30
                      shadow-economy work decisions  than are
                   29  0.62  percent of  GDP.  Purnomo,  Kuntarto,  2010,”Estimasi
                   Underground Economy di Indonesia” Tesis.         30 Ibid.
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