Page 6 - Working Paper (Narrowing Tax Gap: Cross Countries Experience)
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DDTC Working Paper 0915

                                                                    3. Tax Capacity and Tax Effort:
                   difference between the total  cost of labor  in the
                   official  economy  and  the  after-tax  earnings  from   Comparative Studies
                   work, the greater the incentive for workers to move
                   to the shadow economy. Several studies have found         TAx CApACiTy ANd EfforTs
                   strong evidence that the tax regime and types of tax             prEsENT siGNifiCANT
                   administration influence the decision of taxpayers   dEviATioNs ACross CouNTriEs,
                   to work in formal or informal sectors. With evasion   iNComE Groups ANd rEGioNs,
                   being  such  as  a  dominant  issue, countries face
                   additional pressure to lower tax rates, as the main              As wEll As ovErTimE.
                   tool, in order to draw individuals and firms into the
                   formal economy and to dis-incentive those already
                                                                       Figure 3 covers three period of time from 2008
                   in the compliance spectrum to underreport their
                                                                    to 2010 fiscal year. Indonesia collected lower tax
                   income.  South  Korea,  for  example,  reduced  its
                                                                    revenues  (over  GDP)  compared  to  neighboring
                   effective corporate tax rate from 53 to 27 percent,
                                                                    countries  like  Malaysia,  Singapore,  and  Thailand.
                   while corporate tax receipt doubled as a fraction of
                                                                    Most  of  the  observed  countries  experienced  a
                                                                    modest decrease during those periods of time as
                                                                    a consequence of Global Financial Crisis started in
                      India  has  also  reduced  its  personal  and
                                                                    2008. The observed trend in tax collection implies
                   corporate income tax rates dramatically in recent
                                                                    that  country  like  Indonesia  is  being  trapped  in
                   years, yet its tax revenue has doubled as a fraction
                                                                    a structural  dilemma, which  typically has low
                   of GDP. In Indonesia, corporate tax rate has been
                                                                    taxable capacity coupled with inefficient collection
                   reduced  from  28  percent  (January  –  December
                                                                    structure overwhelmed by consumption taxes while
                   2009)  to  25  percent  (from  December  2009
                                                                    having  enormous  needs  to  finance  development
                   onwards).  While  for  Personal  Income  Tax,  the
                                                                    needs. Usually, peer countries in the same region
                   tax rate decreased from 10 percent (up to IDR 50
                                                                    are likely to share certain commonalities in their
                   million) to 5 percent (up to IDR 50 million) in order
                                                                    tax  structure due to their  similar economic  and
                   to attract more taxpayers into the system. However,
                                                                    social factors; but somehow their tax receipts are
                   the VAT rate has been kept constant since 1995 at
                                                                    varies considerably. Enforcement as well as ratio of
                   10 percent with five percent deviation and VAT for
                                                                    tax agent to taxpayer influences larger tax revenue.
                   export  sets  at  zero  percent.  While  Indonesia  has
                   gone through a series of tax reform since 2001, tax   The  regional pattern  of  tax  collection shows
                   compliance levels are still low with rates of filing   that  the  Central  European  region  tax  ratio  has
                   estimated at 50-60 percent of registered taxpayers.  outperformed other regions. The figure stands at
                                                                    18.1 percent in 2010 or almost 5 percent higher
                                                                    than East Asia and Pacific (EAP) region . The ratio
                                                                    in EAP had been declined from around 12 percent
                                                                    in  2008  to  around  11.5  percent.  OECD  high-
                                                                    15 This region consists of all South East Asian countries.
                                               Figure 3 - Tax Ratio by Countries (2008-2010)


                        % GDP  15                                                                        2009



                                AUS  CHN  EGY  IDN  IND  JPN  KOR  MYS  NZL  PHL  PRY  SGP  LKA  THA  GBR  USA  CAN  MAR
                                                   Source: The World Bank Classification and WDI
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