Page 14 - Working Paper (Tax Policy Options during Economic Downturn)
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DDTC Working Paper 1315

                         investment  vehicles and tax  provisions            During  2010-2013  Fiscal  Year,  a  one
                         which act as a barrier to the use of different   percent decrease of economic growth lower
                         financial products which reduce the cost of      than  the  assumed  figure  would  cause  a
                         capital .                                        larger deficit by around IDR 4.5 – 5 trillion.
                                                                          Depreciation  of  Rupiah  and  an  increase
                            The  government also plan  to give tax        in  the  3  month  SBI  interest  rate  would
                         amnesty to offshore assets and income            also raise APBN deficit because the cost of
                         and  would  make immunity  from all              APBN  financing  increases.  Therefore,  the
                         charges  of  financial  crimes  in  exchange     government must  apply policies that  suit
                         of repatriating assets to Indonesia. This        to fiscal sustainability and macroeconomic
                         effort considers  additional revenues in         stability.  Although effort to increase tax
                         the near future but  carries  the risk of        revenues would narrow the deficit; the effect
                         moral  hazard  and  non-compliance  that         to the whole economy in the short span
                         could impede  revenue realization in the         would be counter-cyclical especially during
                         future. It  is highly recommended  that  the     economic slowdown. The government must
                         government synergize short- and medium-          surely apply relaxed fiscal policies through
                         term  target before implementing the             tax  incentives, foster  capital  and social
                         policy. Furthermore, the government has          government expenditures to help domestic
                         introduced  some fresh  steps that  include      demand from decreasing further.
                         the  introduction  of electronic tax  return
                         submission,  improving tax  audit towards        •  Reallocating  unproductive  government
                         alleviating transfer pricing especially on big     expenditure  to  create  more  fiscal  space
                         multinational corporations, and intensively        and relocating items to productive sectors;
                         supervise  industries  or  businesses  that      •  Intensify  government agenda  on tax
                         are prone to tax  evasion. One of  the             compliance focusing on large taxpayers
                         necessary  conditions for the above efforts        during a crisis and enhance the scrutiny
                         to  be succesfully implemented  is  to  have       of  cross  border  transactions;  firm
                         an increase ratio of tax officials to potential    enforcement should be focused  against
                         number of taxpayers.                               businesses that  have the capacity to pay
                      4.2 Policy recommendations                            but refuse to do so.
                                                                               In  the  medium/long-term  or  after
                            In the end, the author divides policy
                                                                          the economy survives from the crisis,  the
                         recommendation based on the two possible
                                                                          government could exercise what economists
                         timings – short and medium/long term. In
                                                                          say  as  “Ricardian  Equivalence”  where  the
                         the short term, the government needs to:
                                                                          authorities would primarily and directly
                         •  Improve the quality  of  central  and local   focus on tax collection enhancement
                           government spending. These include, but        and remove some  of tax incentives
                           not limited to: (i) identify the bottleneck    previously enacted  to  compensate the
                           and  constraint  of the  government            amount of  tax receipts  forgone  during
                           procurement  processes  and   delays           the crisis. As abovementioned, this tight
                           in  the  disbursement;  (ii)  strengthen       fiscal  policy  should  be  complemented
                           collaboration and coordination of line         with accommodative  monetary policy.
                           ministries  in structuring  good  budget       Combination  of  the  two  policies  would
                           planning (e.g. medium-term plan and the        crowd in private investment and further
                           government yearly work  plan  as well  as      positively spur private consumption, exports
                           line  ministries  budget  execution  plans);   and eventually the economy as a whole.
                           (iii)  improvement  in  government  budget
                           administration; (iv) consider and enhance
                           fiscal  risk  and  contingent  liabilities
                           calculation  into the national  budget
                           preparation to accommodate uncertainty
                           in macroeconomic indicators; (v) provide
                           stick and carrots to the performance  of
                           local governments.

                   34. OECD (2009),”Strategic Response to the Financial and Economic
                   Crisis”, OECD Report.
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