Page 5 - Working Paper (Narrowing Tax Gap: Cross Countries Experience)
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DDTC Working Paper 0915

                   in  Indonesia  matches  to  middle-high  income   of tax  evasion,  several  developing  countris such
                   countries average.                               as Brazil, South Korea, and India, impose a tax on
                                                                    bank  debits.  South  Korea  has  created  a  subsidy
                        Figure 1 - Comparison of Shadow Economy     to use credit cards, presumably hoping to shift
                                                                    transactions to a form that can be monitored and
                          40     40     33            34            taxed more easily.  Another approach is to lower
                    % of Shadow Economy        19                   the informal economy. By reducing the differential
                                                                    tax rates in sectors where it is easier to shift into
                                                                    tax rates across sectors, economic efficiency can be
                                                                       We also want to look deeper into the performance
                                                                    of different  tax  administration  structure in
                          Low   Low-Middle  Middle-High   High   Indonesia  collecting  taxes.  Surprisingly,  there  is  a  different
                         Income  Income  Income  Income
                                                                    between the two types of administrations. From
                        Source: Kristiadji (2013) and WDI World Bank (2010)
                                                                    our analysis, it appears that countries that adopt
                                                                    Semi-Autonomous  Revenue  Authorities  (SARA),
                      One half or  more of  developing world’s
                                                                    the percentage of shadow economy is lower (25.92
                   non-agricultural  workers  are employed  in the
                                                                    percent).  Although,  the  difference  between  these
                   underground informal sector, according to the
                                                                    two  groups  is  essentially  not  significant.  In  the
                   International  Labor  Organization.  Employment
                                                                    context of tax morale (the data is taken from the
                   in the informal  sector is estimated to be  more
                                                                    World Values Survey), there is also no significant
                   than 50 percent of  non-agricultural  employment
                                                                    different between the two groups. Taxpayers  in
                   and nearly 30  percent of non-agricultural  Gross
                                                                    the two groups of countries tend to have the same
                   Domestic Product (GDP) in Asia. In Indonesia, 70
                                                                    views over justification of doing tax fraud. On the
                   percent of the workforce was estimated be engaged
                                                                    other hand, the occurrence of tax bribery is more
                   in informal employment, mostly in the agriculture
                                                                    apparent in the countries that adopt the non-SARA
                   sector .  BPS  Indonesia  estimated  informal
                   employment to be about 64 percent in 2006 (and
                   about 62.1 percent in 2009) and the share of small   Figure 2 - Shadow Economy and Tax Morale in SARA
                   enterprises  (that  seem  to  be  mostly  informal)  to      and Non-SARA Countries
                   the GDP output to be roughly 38 percent. Number
                   of  informal  worker  in  Indonesia,  in  the  absolute   Shadow Economy   Tax Morale
                   value, increased from 55.81 million people in 2001            28.87
                   to 64.84 million in 2009, or in other words there                              2.13
                   was an increase  of  around 16.2  percent during   % GDP  25.92          Scale        2.07
                   those periods.
                      Macroeconomic  and  microeconomic  modeling
                   studies based on data for several countries suggest
                   that  major  driving  forces  behind  the  size  and   SARA  Non-SARA          SARA  Non-SARA
                   growth of the shadow economy are an increasing     Source: Tax morale data is from World Values Survey, various years.
                   burden of tax  and social security payments,       While, shadow economy data are extracted from Schenieder, Buehn,
                                                                                   dan Montenegro (2012).
                   combined  with  rising  restrictions  in  the  official
                   labor market. Therefore, countries with relatively
                   low  tax  rates, fewer  laws and regulations,  and a   2.2.  Tax Evasion
                   well-established rule of law tend to have smaller
                   underground economies.  Or  in  other words,            whilE iNdoNEsiA hAs GoNE
                   factors  related to socio-economic  conditions  and        ThrouGh A sEriEs of TAx
                   tax  regimes  in the neighboring  countries  heavily           rEform siNCE 2001, TAx
                   influence  tax  collection  pattern  in  a  specific
                   country. One way to identify the size of the shadow    CompliANCE lEvEls ArE sTill
                   economy is  through the rising transaction using          low wiTh rATEs of filiNG
                   cash.  Rising  activity  in  the  shadow  economy  is   EsTimATEd AT 50-60 pErCENT of
                   likely to push up the demand for  currency. To                 rEGisTErEd TAxpAyErs.
                   reduce  the attractivenes  of  using cash  as means

                                                                       Taxes  add  to  the  cost  of  labor  in  the  official
                   14 Firdausy, Carunia Mulya, 2000,”Size, Nature, Issues and Policies of   economy and hence  are key factors  driving the
                   International Migration from Indonesia to Asia”, Ministry of Research and   growth  of the informal  economy.  The bigger the
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