Page 13 - Working Paper (Narrowing Tax Gap: Cross Countries Experience)

DDTC Working Paper 0915
13

5. Conclusion and Policy average tax rates;
Recommendations • More frequent tax audits and heavier penalties

for tax evasion may reduce the size of the
5.1. Conclusion shadow economy;
• Governments should put more emphasis on
This paper intends to analyze the different
legalizing certain shadow economy activities,
between actual tax revenue and maximum predicted
for example by liberalizing the labor market;
tax collection by reviewing previous papers
related to the topics. Most of developed countries, • Reforms that liberalize regulations and make
especially those of OECD member countries, have a the economy more competitive reduce the
high level of tax capacity followed by highest degree incentives for corruption, and encourage firms
of tax effort. Meanwhile, countries in East Asia to move from the shadow economy into the
and Pacific stand at different level of tax capacity official one;
and effort. Indonesia, for example, is still at low • Governments should put emphasis on the
level of tax ratio (11.9 percent) and tax capacity rule of law and on the strict enforcement of a
(28 percent) as well as tax effort (47 percent). minimum necessary set of regulations, rather
Commitment from government to enhance tax than on increasing the number of regulations.
policies and improve tax administrations added
with comprehensive and collective enforcement There should be a comprehensive measurement
measurement could be used as panacea to the to tackle revenue collection issues. A necessary
lingering problems in tax collection. condition is a clear government commitment.
Specific to strategies, there are some ways for tax
Based on previous studies, we also review administration to increase revenues, as follow:
papers related to shadow economy. Shadow
economy tends to be larger in the countries that • More strategic and risk-based compliance
exercise: management approach. A risk-based approach
means focusing on increasing registration, filing
• Ineffective tax system combined with and auditing in high-risk (high tax potential but
unnecessary regulations by the governments; low compliance) sectors and segments. For
• A heavily regulated economy with weak example, revenue performance can be lifted
administration; significantly by focusing resources on improving
voluntary filing and payment compliance levels
• Rampant collusion and corruption due to
among large taxpayers, where performance
pervasive administrative problems;
significantly lags international standards
• High unemployment and large earlier
(currently 50-60 percent versus more than 98
retirement;
percent in other countries).
• Decline of trust towards public institutions.
• Continue improving capacity to analyze third-
• It is also reflected in the fall of the number of party information (e.g., more access to third-
labor market participation. party data, improve the design of National Tax
Census, and enhance data and IT management),
In the case of Indonesia, the size of underground
and coordination with other stakeholders
economy measured by the currency demand
especially financial service authorities (most
approach from the period of 2000 to 2009 was
immediate challenge).
about 5.04 percent of GDP with the potential tax
• Simplifying tax structures and greater
revenue of about IDR 18.86 trillion each year. 29
dissemination of tax information. International
5.2. Policy Recommendations experience shows that increasing the level of
voluntary compliance is a more cost-effective
approach to compliance management in the
The findings from previous studies on how to
long-term. This requires providing services
alleviate shadow economy problems contain some
such as call centers, mobile filing and payment
useful policy recommendations:
options to assist taxpayers who are willing
to comply but lack capacity or information
• Reductions in tax rates will not substantially
to properly fulfill their tax obligations, and
shrink the shadow economy, but they may be
rewarding those taxpayers with high levels of
able to reduce it;
voluntary compliance with lower costs of doing
• Marginal tax rates are more relevant to people’s
business. 30
shadow-economy work decisions than are
29 0.62 percent of GDP. Purnomo, Kuntarto, 2010,”Estimasi
Underground Economy di Indonesia” Tesis. 30 Ibid.