Why Do Not We Collaborate through a Fiscal Contract?
Why Do Not We Collaborate through a Fiscal Contract?

Why Do Not We Collaborate through a Fiscal Contract?

“Effective taxation is possible when the taxpayers and tax authorities know what to expect from each other.”Von Schiller

The Master of Public Administration Program at the University of Kentucky required me to accomplish a capstone project for graduation. Fortunately, my advisor approved my topic: Improving Indonesian Tax Compliance through the Program Pengungkapan Sukarela 2022 (Voluntary Disclosure Program or VDP). Some recognized it as similar to the Pengampunan Pajak 2016 (Tax Amnesty or TA), which asked us as taxpayers to declare wealth information to get tax incentives. However, both programs are great alternatives to improve voluntary compliance.

One thing that affected our compliance was the tax system, especially self-assessment, which asked taxpayers to register, pay the obliged tax, and file tax return. Some avoided and evaded taxes because of the complexity. Unfortunately, according to the Tax Justice Network report, their action costs the Indonesian government $4.86 billion annually (Luib, 2020). If the government loses the opportunity to make revenues for running public programs, the inequality among us will be wider.

What can make us more compliant? The answer is a trustable tax system and fair tax administration. Both are political support that maintains facilitation, enforcement, and trust to empower taxpayers and create fiscal contracts (World Bank, 2019). It is an implicit agreement between the state and taxpayers that associates tax compliance (Von Haldenwang, 2020). The taxpayers are more willing to comply if they perceive that the tax burden is fairly distributed, their benefits are broadly in line with what they pay, and they can meaningfully influence political decision-making (Levi, 1988). A political rule that extracts tax revenue without coercion tends to be more efficient and enjoys greater legitimacy than merely coerces (Olson, 1965). Moreover, effective taxation is possible when the taxpayers and tax authorities know what to expect from each other (von Schiller, 2018). Long-term compliance could happen if the Directorate General of Taxes (DGT) keeps paying attention to the inputs of fiscal contract.

Source: World Bank’s Tax Compliance Model (2019)

The 2022 VDP is an example of strengthening fiscal contracts by providing us with lower tax rates as long as we can inform undeclared assets to DGT. This program successfully collected short-term revenue to recover the economy post-COVID-19 pandemic. Some participants are taxpayers who have joined the 2016 TA; others have newer assets (2016-2021) but have yet to declare them to DGT. Even though their compliance is still questionable, DGT should keep fairness for compliant taxpayers by aligning every amnesty with law enforcement for non-compliant ones.

What will happen to us after the 2022 VDP?

To remind us, DGT held the 2022 VDP because The Minister of Finance said the 2016 TA results could not increase the tax ratio and improve the economy. On the other hand, the 2022 VDP successfully collected revenues but still should reach long-term compliance. It aligns with the revenue policy in the 2023-2024 Macroeconomic Framework and Fiscal Policy to increase the tax ratio by broadening the tax base and monitoring tax compliance.

DGT will validate our wealth declaration of those who participated through their tax intelligence unit, explore the information of those who did not participate through the extensification unit, and request more Automatic Exchange of Information (AEoI) of our offshore assets through the international taxation unit. Besides, DGT will keep educating us about tax obligations through their public relations unit and monitor our tax payments assisted by their account representatives and tax auditors. Those efforts aim at a less complex system by reducing the taxpayers’ time and money to maintain tax compliance (Slemrod & Bakija, 2017).

On the other hand, DGT should carefully manage our wealth information of those who participated to secure future compliance. Besides, DGT should fulfill another incentive, like not considering the wealth to be audited or investigated. Those actions would impact our tax morale at all levels: (1) For some of us who have not complied, DGT will develop a reasonable expectation of compliance rather than reinforcing the benefit of tax evasion; (2) For some of us who wanted to comply,  DGT will build awareness for future compliance in a supportive way; (3) For some of us who have complied, DGT will reinforce compliance with the law’s certainty. Boosting tax morale should align with law enforcement because there always be non-compliant taxpayers and compliant ones; Paying taxes must be the responsibility of citizens (Slemrod & Bakija, 2017).

Furthermore, DGT should keep the promise that the 2022 VDP was the last tax amnesty for non-compliant taxpayers. It raises unfairness for some of us who have been compliant if the program is repeated, even though VDP or tax amnesty is a better solution than a regular audit to tackle evasion (Alstadsaeter et al., 2019). Besides, the tax authority should monitor non-participants, incredibly the rich, because they create inequality. Related to the discussion of fiscal contracts earlier, the relationship between the tax authority and taxpayers requires trust to create voluntary compliance (Slemrod & Bakija, 2017).

Recommendations for DGT

I recommend that DGT continue implementing post-2022 VDP treatment as the key to law enforcement and learning evasion schemes, especially for those who have already participated in the 2022 VDP. The data from the program press conference stated that their declaration and tax revenue was lower than those who participated in the 2016 TA. This monitoring would require high administration costs but will increase future revenue and compliance. 

Besides, DGT could benchmark what Internal Revenue Service did to maintain their taxpayers’ voluntary compliance post amnesties through law enforcement as “sticks” and information reporting programs as “carrots” such as Criminal Investigation Voluntary Disclosure Program, Streamlined Filing Compliance Procedures, International Information Submission Procedures, and Filing Amended Returns (Brown & Markarian, 2019). Notably, taxpayers’ behavior should be monitored post-information reporting because avoidance and evasion possibly happen if the tax system is still complex.

A fiscal contract is a win-win solution for all of us to comply voluntarily to support our economic transformation into a more inclusive and sustainable one.

References:

Levi, M. (1988). Of rule and revenue. Berkeley and Los Angeles: University of California Press.

Luib, M. (2020, November 24). Tax evasion in Indonesia costs Govt $4.86 billion in annual losses Halaman. KOMPAS.com. Retrieved February 10, 2023, from https://go.kompas.com/read/2020/11/24/193251774/tax-evasion-in-indonesia-costing-govt-486-billion-in-annual-losses?page=all

Olson, M. (1965). The logic of collective action: Public goods and the theory of group. Cambridge, MA: Harvard University Press.

Slemrod, J., & Bakija, J. (2017). Taxing ourselves: A citizen’s guide to the debate over taxes (Fifth). MIT Press.

Von Handelwang, C. (n.d.). Digitalising the Fiscal Contract: An Interdisciplinary Framework for Empirical Inquiry. https://www.idos-research.de/uploads/media/DP_20.2020_01.pdf 

Von Schiller, A. (2018). Party system institutionalization and reliance on personal income taxation in developing countries. Journal of International Development, 30(2), 274-301. doi:10.1002/jid.3347

World Bank. (2019). Innovations in tax compliance Conceptual Framework – World Bank. Retrieved March 10, 2023, from https://documents1.worldbank.org/curated/en/816431569957130111/pdf/Innovations-in-Tax-Compliance-Conceptual-Framework.pdf

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