Page 5 - Working Paper (Narrowing Tax Gap: Cross Countries Experience)

DDTC Working Paper 0915
5

in Indonesia matches to middle-high income of tax evasion, several developing countris such
countries average. as Brazil, South Korea, and India, impose a tax on
bank debits. South Korea has created a subsidy
Figure 1 - Comparison of Shadow Economy to use credit cards, presumably hoping to shift
transactions to a form that can be monitored and
40 40 33 34 taxed more easily. Another approach is to lower
% of Shadow Economy 19 the informal economy. By reducing the differential
tax rates in sectors where it is easier to shift into
tax rates across sectors, economic efficiency can be
elevated.
We also want to look deeper into the performance
of different tax administration structure in
Low Low-Middle Middle-High High Indonesia collecting taxes. Surprisingly, there is a different
Income Income Income Income
between the two types of administrations. From
Source: Kristiadji (2013) and WDI World Bank (2010)
our analysis, it appears that countries that adopt
Semi-Autonomous Revenue Authorities (SARA),
One half or more of developing world’s
the percentage of shadow economy is lower (25.92
non-agricultural workers are employed in the
percent). Although, the difference between these
underground informal sector, according to the
two groups is essentially not significant. In the
International Labor Organization. Employment
context of tax morale (the data is taken from the
in the informal sector is estimated to be more
World Values Survey), there is also no significant
than 50 percent of non-agricultural employment
different between the two groups. Taxpayers in
and nearly 30 percent of non-agricultural Gross
the two groups of countries tend to have the same
Domestic Product (GDP) in Asia. In Indonesia, 70
views over justification of doing tax fraud. On the
percent of the workforce was estimated be engaged
other hand, the occurrence of tax bribery is more
in informal employment, mostly in the agriculture
apparent in the countries that adopt the non-SARA
14
sector . BPS Indonesia estimated informal
system.
employment to be about 64 percent in 2006 (and
about 62.1 percent in 2009) and the share of small Figure 2 - Shadow Economy and Tax Morale in SARA
enterprises (that seem to be mostly informal) to and Non-SARA Countries
the GDP output to be roughly 38 percent. Number
of informal worker in Indonesia, in the absolute Shadow Economy Tax Morale
value, increased from 55.81 million people in 2001 28.87
to 64.84 million in 2009, or in other words there 2.13
was an increase of around 16.2 percent during % GDP 25.92 Scale 2.07
those periods.
Macroeconomic and microeconomic modeling
studies based on data for several countries suggest
that major driving forces behind the size and SARA Non-SARA SARA Non-SARA
growth of the shadow economy are an increasing Source: Tax morale data is from World Values Survey, various years.
burden of tax and social security payments, While, shadow economy data are extracted from Schenieder, Buehn,
dan Montenegro (2012).
combined with rising restrictions in the official
labor market. Therefore, countries with relatively
low tax rates, fewer laws and regulations, and a 2.2. Tax Evasion
well-established rule of law tend to have smaller
underground economies. Or in other words, whilE iNdoNEsiA hAs GoNE
factors related to socio-economic conditions and ThrouGh A sEriEs of TAx
tax regimes in the neighboring countries heavily rEform siNCE 2001, TAx
influence tax collection pattern in a specific
country. One way to identify the size of the shadow CompliANCE lEvEls ArE sTill
economy is through the rising transaction using low wiTh rATEs of filiNG
cash. Rising activity in the shadow economy is EsTimATEd AT 50-60 pErCENT of
likely to push up the demand for currency. To rEGisTErEd TAxpAyErs.
reduce the attractivenes of using cash as means

Taxes add to the cost of labor in the official
14 Firdausy, Carunia Mulya, 2000,”Size, Nature, Issues and Policies of economy and hence are key factors driving the
International Migration from Indonesia to Asia”, Ministry of Research and growth of the informal economy. The bigger the
Technology.