Page 5 - Working Paper (Fiscal Decentralization and Sub-national Taxes: Specific Case of Indonesia)
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DDTC Working Paper 1015

                   subsequent over reliance on transfers make local          Table 3 - Criteria for Tax Incidence
                   governments  fiscally  lazy  and  reduce  spending   1) Equity and Fairness: Taxpayers should be taxed
                   efficiency and accountability.                    equally
                                                                     2) Certainty: Tax rules should clearly specify such
                      The  recent decentralization  of the urban
                                                                     as when tax is to be paid, how it is to be paid and
                   and rural  property tax  to Indonesian regional
                                                                     how to be determine the amount that needs to be
                   governments  has the potential  to  strengthen
                   fiscal  capacity  of  the  regions.  But  property  tax
                   decentralization  is not  proceeding smoothly.  As   3) Convenience of Payment: A tax should be due
                   of  2012  only  Surabaya  has  successfully  taken  on   at a time or in a manner that is most likely to be
                   responsibility for  administering taxes  related  to   convenient for the taxpayers.
                   property and property title transfer . By the end of   4) Economy: The cost of collection should be kept
                   2013, which is the deadline for local governments   minimum
                   to assume control  over the relevant  taxes, only   5) Simplicity: The tax law should be simple so that
                   a small  number of additional,  mostly large      taxpayers understand the rules and should comply
                   municipalities are expected to be actively collecting   with them correctly
                   the tax. The vast bulk of subnational governments
                   will  apparently not assume administrative        6) Neutrality: The effect of the tax law on taxpayers’
                   responsibility for  the property tax  before the   decisions as to how to carry out a particular
                   deadline and collection of  the tax  may well  be   transaction or whether to engage in a transaction
                   discontinued in those places. This would represent   should be kept to a minimum.
                   a significant missed opportunity to increase own-  7) Economic growth and efficiency: The tax system
                   source revenues and enhance spending efficiency   should not impede or reduce the productive
                   and  accountability.  According  to  Bird  (2001),   capacity of the economy.
                                                                     8) Transparency and Visibility: Taxpayers should
                          Table 2 - A Recommended Local Tax
                                                                     know that a tax exists and how and when it is
                    1) Tax base should be immobile, so that sub-     imposed upon them and others.
                    national governments can vary the tax rate without   9) Minimum tax gap: a tax should be structured to
                    the taxable base moving somewhere else.          minimize noncompliance
                    2) The tax yield should be adequate to meet local   10) Appropriate government revenues: The tax
                    needs, be stable, and be predictable.            system should enable the government to determine
                    3) Tax base should not be easy to export to      how much tax revenue will likely be collected
                                                                     Source: Bird, Richard. 2001. “Setting the Stage—Municipal and Intergovernmental
                    4) Tax base should be visible to ensure          Finance.” in Challenges of Urban Governments, edited by M. Freire and R. Stren.
                                                                     Washington, DC: World Bank Institute.
                    5) Taxpayers should perceive the tax as fair.   property tax is a good local tax because the base is
                    6) The tax should be easy to administer         immobile and the tax is visible; although, it requires
                                                                    technical capacity and political commitment. Much
                    Source: Bird, Richard. 2001. “Setting the Stage—Municipal and Intergovernmental
                    Finance.” in Challenges of Urban Governments, edited by M. Freire and R. Stren.   progress  is still  needed  especially in developing
                    Washington, DC: World Bank Institute.
                                                                    countries,  where the property  tax  represents  a
                                                                    very  small  proportion of tax  revenue and where
                                                                    the infrastructure for setting up a property tax is
                   targeted  and preferable  local  taxes  have  several
                                                                    often not  in place.  There are some drawbacks of
                   features which are shown below.                                      13
                                                                    property taxes such as
                      Furthermore, according to American Institute of
                                                                    •  The high cost of accurate valuation of property
                   Certified Public Accountants (2013), tax incidence        14
                                                                       values ;
                   should follow some criteria such as shownin Table
                                                                    •  The political difficulty of enforcement;
                                                                    •  The apparent inelasticity of property values with
                      Most  of  locally  own-source  revenue  in       respect  to  GDP  or  national  income  (property
                   Indonesia comes from the property and business      values respond less quickly to changes in GDP
                   tax . However, in other countries, sales as well as   than income or sales)
                   income taxes also apply locally. As stated above,
                                                                    •  The fact that few jurisdictions update property

                   11. Ibid.                                        13. Op.cit, Freire, E.M and Hernando Garzon, 2013.
                   12. In developing countries, property taxes seldom account for more than   14. Tax base is valued based on, to name a few: rental value, capital
                   20 percent of local current revenues- or less than 1 percent of total public   value of land and improvements, land value, and physical area. Most
                   spending (Bahl and Martinez-Vazquez, 2007).      countries utilized toward capital value of land and improvements.
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