Page 3 - Working Paper (Asymmetric Information & Its Impact On Tax Compliance Cost In Indonesia)

DDTC Working Paper 0113 DDTC Working Paper 0113
3

1. Introduction above, this article will attempt to study the subject
on asymmetric information and its impact on
In conforming with government requirements compliance cost, thereby focusing on a conceptual
for compliance with tax laws, businesses are at least approach and its relationship with current tax
faced with the following kinds of expenditures: developments in Indonesia.
(i) the sacrifice of income from the payment
Figure 1 - Regulation, asymmetric information and
of the tax itself; (ii) distortion costs, which are compliance cost
costs that arises from changes in the supply and
demand of products due to taxes, which in turn
alter the pattern of economic behavior; and (iii) Regulation ASymmETRIC INFORmATION
tax operating cost, which are the resources needed
to take up in operating the tax system in order
to comply with tax regulations. From business
perspective, tax operating cost is considered as
compliance cost. 2 Compliance Cost

The theory regarding compliance cost and
its impact on taxation was first introduced by
Sandford (1973). According Sanford, compliance
costs and other administrative expenditures are
Tax Revenue and
considered as the hidden cost of taxation. Since Economic Activities
then, various studies have been conducted, which
2. Theory of asymmetric information
acknowledge compliance cost as an important
and compliance cost
variable for increasing the level of compliance of
taxpayers.
2.1. Asymmetric Information
Most of these studies only clarifies that a
complexity of a tax system has a direct relationship
Asymmetric information is one of the important
with compliance cost. Yet, there is no further study
branches in the discipline of microeconomics,
on the subject regarding the level of impact that
which clarifies the behavior patterns of actors in
a complexity of a tax system has on compliance
a transaction in the situation where there is an
cost, especially in Indonesia. For instance, whether
imbalance of information that could potentially
a simple tax system would automatically result
result in a market failure. The theory on the subject
in a decrease of compliance cost or the other
was first introduced by George Akerlof (1970),
way around? Surely the answer to this question
through his paper titled “The Market for Lemons:
could be found if also the behavior pattern of
Quality, Uncertainty and the Market Mechanism”.
stakeholders in a tax system is known. This is what
Joseph Stiglitz and Michael Spence further
has been lacking on the research on compliance 3
developed the theory. The theory of asymmetrical
cost, particularly in Indonesia.
information has been applied in various contexts
and cases, such as: stock markets, insurance,
In the author’s opinion, the missing link
investment decisions by companies and others.
between the relationship of compliance cost and
the complexity of a tax system starts from the
Normally, an agreement or a written contract
situation of asymmetric information (see Figure 1).
could reduce losses that could arise from
Simply put, asymmetric information is a situation
asymmetric information. Ideally, a contract should
where one party has more or better information
become a solution for each party in the transaction
than the other party, while negotiating a contract
to optimally satisfy each party in the transaction
to a transaction. In such a situation one of the party
in accordance with their expectations. In order to
will lack the ability to observe the other party’s
so, a contract should at least fulfill the following
actions and preference, thus creating an imbalance
requirements: (i) the contract should be feasible;
of power in transactions.
(ii) the contract should produce an outcome that is
deemed rational for each party; (iii) every measure
Up to date, there is lack of comprehensive data
agreed in the contract should give an incentive
to study the level of compliance cost in Indonesia,
especially when the subject is connected with the
issue of asymmetric information. Despite of the 3 Both authors have contributed in the clarification of behavior patterns
of economic agents in an Asymmetric Information situation. Stiglitz
pioneered the theory of “screening”. In this way, the under informed party
2 Cedric Sandford, “General Report: Administrative and Tax Compliance can induce the other party to reveal their information. While Spence,
Costs of Taxation”, in Administrative and Tax Compliance Costs of introduced the idea of “signaling”, where in a situation of Asymmetric
Taxation (Editor: Cedric Sandford), Kluwer Law and Taxation Publishers, Information it is possible for people to signal their type, thus believable
1989, p. 20. transferring information to the other party and resolving the asymmetry.