Page 4 - Working Paper (Fiscal Decentralization and Sub-national Taxes: Specific Case of Indonesia)
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DDTC Working Paper 1015

                                                                    2. Concept of Managing Local Revenues
                   well by the amount of the increase in rate. However,
                   it will create a negative impact to the economy by
                   reducing output and employment. Finding the best              capaciTy of sub-naTional
                   rate for each tax is crucial not only for government          governmenT To generaTe
                   revenue and for the economy as a whole. Therefore,             own source revenues is
                   it  is recommended  that  each local  government           among imporTanT facTor in
                   constantly improve their tax administration.
                                                                      deTermining The success of fiscal
                      More  recent  authors  generally  continue  to                     decenTralizaTion.
                   emphasize that each level of government should be
                   assigned taxes that are as closely related as possible
                   to the benefits derived from spending them  which   Sub-national  governments  need  to  provide
                                                                    public goods  to its citizen. The cost of providing
                   often relates to the property and  business tax.
                                                                    the services  hopefully is covered through local
                   It  has great  revenue  potential,  its burden rests
                                                                    taxes and user charges collection. The sources of
                   with middle and upper income families, and it
                                                                    revenue for sub-national governments vary across
                   distors business and consumer economic decision
                                                                    countries but generally include taxes, user fees and
                   less than do other taxes, as well as it could be an
                                                                    charges, and intergovernmental  transfers.  Other
                   important part of a national fiscal decentralization
                   strategy .  Specific to property tax, it has failed to   revenues may include investment income, property
                                                                    sales, licenses  and permits.  In terms  of  taxes,
                   become a significant revenue generator that only
                                                                    property and business taxes are probably the most
                   raise an amount equivalent to around 0.6 percent
                                                                    often levied by sub-national governments around
                   of  Gross  Domestic  Product  (GDP),  on  average,  in
                                                                    the world.   Other permissible local taxes include,
                   developing and transition economies.  In many
                                                                    but  not limited  to, income  taxes, general  sales
                   developing economies,  less than  half of  property
                                                                    taxes, and selective sales taxes (for example, taxes
                   value  is  taxed and  complemented by marginally
                                                                    on fuel, liquor, tobacco, hotel room ooccupancy and
                   low rates.
                                                                    vehicle registration) and land transfer taxes. These
                      The theory of public finance considers that each   taxes  are usually collected  at  the provincial level
                   policy that will be taken should take into account   and shared with district or municipality according
                   efficiency  (allocation),  equity  (distribution),  and   to predetermined formulas. In Indonesia, we call it
                   stabilization  goals.  Relinquishing  some  of  the   as revenue-sharing grant.
                   taxing power to local governments, unfortunately,
                                                                       Capacity  of  sub-national  government  to
                   will  absolutely lead to a problem  of widening
                                                                    generate own source revenues is among important
                   income  gap due to existing differences  in needs
                                                                    factor  in  determining  the  success  of  fiscal
                   and capacities between different governmental
                                                                    decentralization. An important rule of sound fiscal
                   units at the same level of government. However, an
                                                                    decentralization  is  that  finance  should  follow
                   improvement of public services at the region can
                                                                    functions.   Decentralization,  in  reality,  is  much
                   only be achieved if sub-national government is also
                                                                    easier  to devolve expenditure sides  rather than
                   being provided by enough resources to cover its
                                                                    revenues. In  many developing  countries a  major
                   expenses.  Nevertheles,  central  government’s  role
                                                                    problem  for sub-national  government relates to
                   in enhancing capacity of tax administration at the
                                                                    insufficient  funding  for  public  investments.  First,
                   local level is still required to improve tax collection.
                                                                    local  governments  have  insufficient  own-source
                       This paper focuses on the concept of managing   revenues  relative  to  intergovernmental transfer.
                   local revenues and which taxes should be assigned   It  comprises  of less than  10 percent of the total
                   to different kinds of government. Section 2 provides   budgets.  This is about  the  same as  regional
                   literature review of the concept  of managing    governments in India, Pakistan,  and Thailand
                   local  revenues.  Section  3  describes  process  of   but  considerably less than local  governments
                   decentralization  in  Indonesia.  Section  4  shows   in  Philippines  (30  percent),  China  (40  percent),
                   the performance of sub-national tax in Indonesia.   Vietnam (50  percent), Japan (60  percent), and
                   Section 5 concludes.                             Korea (60 percent). International experience shows
                                                                    that  relatively limited own-source revenues and
                                                                    8. Public goods are goods where individuals cannot reasonably be
                                                                    excluded from their use, and their consumption by one individual would
                                                                    not interfere with consumption by another (e.g. national defense, park
                                                                    services, public lighting).
                   6. Bird, R,”Subnational Taxation in Developing Countries: A Review of the   9. Freire, E.M and Hernando Garzon,”Managing Local Revenues”, 2013.
                   Literature”, PREM, the World Bank, Oct 2010      10.  Bahl,  R.”Implementable Rules of  Fiscal Decentralization.”  In
                   7. Bahl, Roy,”Property Tax Reform in Developing and Transition Countries”   Development, Poverty and Fiscal Policy, edited by M.G. Rao, 253-77.
                   USAID, December 2009.                            New Delhi: Oxford University Press. 2002
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