Page 4 - Working Paper (Fiscal Decentralization and Sub-national Taxes: Specific Case of Indonesia)

DDTC Working Paper 1015
4

2. Concept of Managing Local Revenues
well by the amount of the increase in rate. However,
it will create a negative impact to the economy by
reducing output and employment. Finding the best capaciTy of sub-naTional
rate for each tax is crucial not only for government governmenT To generaTe
revenue and for the economy as a whole. Therefore, own source revenues is
it is recommended that each local government among imporTanT facTor in
constantly improve their tax administration.
deTermining The success of fiscal
More recent authors generally continue to decenTralizaTion.
emphasize that each level of government should be
assigned taxes that are as closely related as possible
6
to the benefits derived from spending them which Sub-national governments need to provide
8
public goods to its citizen. The cost of providing
often relates to the property and business tax.
the services hopefully is covered through local
It has great revenue potential, its burden rests
taxes and user charges collection. The sources of
with middle and upper income families, and it
revenue for sub-national governments vary across
distors business and consumer economic decision
countries but generally include taxes, user fees and
less than do other taxes, as well as it could be an
charges, and intergovernmental transfers. Other
important part of a national fiscal decentralization
7
strategy . Specific to property tax, it has failed to revenues may include investment income, property
sales, licenses and permits. In terms of taxes,
become a significant revenue generator that only
property and business taxes are probably the most
raise an amount equivalent to around 0.6 percent
often levied by sub-national governments around
of Gross Domestic Product (GDP), on average, in
9
the world. Other permissible local taxes include,
developing and transition economies. In many
but not limited to, income taxes, general sales
developing economies, less than half of property
taxes, and selective sales taxes (for example, taxes
value is taxed and complemented by marginally
on fuel, liquor, tobacco, hotel room ooccupancy and
low rates.
vehicle registration) and land transfer taxes. These
The theory of public finance considers that each taxes are usually collected at the provincial level
policy that will be taken should take into account and shared with district or municipality according
efficiency (allocation), equity (distribution), and to predetermined formulas. In Indonesia, we call it
stabilization goals. Relinquishing some of the as revenue-sharing grant.
taxing power to local governments, unfortunately,
Capacity of sub-national government to
will absolutely lead to a problem of widening
generate own source revenues is among important
income gap due to existing differences in needs
factor in determining the success of fiscal
and capacities between different governmental
decentralization. An important rule of sound fiscal
units at the same level of government. However, an
decentralization is that finance should follow
improvement of public services at the region can
10
functions. Decentralization, in reality, is much
only be achieved if sub-national government is also
easier to devolve expenditure sides rather than
being provided by enough resources to cover its
revenues. In many developing countries a major
expenses. Nevertheles, central government’s role
problem for sub-national government relates to
in enhancing capacity of tax administration at the
insufficient funding for public investments. First,
local level is still required to improve tax collection.
local governments have insufficient own-source
This paper focuses on the concept of managing revenues relative to intergovernmental transfer.
local revenues and which taxes should be assigned It comprises of less than 10 percent of the total
to different kinds of government. Section 2 provides budgets. This is about the same as regional
literature review of the concept of managing governments in India, Pakistan, and Thailand
local revenues. Section 3 describes process of but considerably less than local governments
decentralization in Indonesia. Section 4 shows in Philippines (30 percent), China (40 percent),
the performance of sub-national tax in Indonesia. Vietnam (50 percent), Japan (60 percent), and
Section 5 concludes. Korea (60 percent). International experience shows
that relatively limited own-source revenues and
8. Public goods are goods where individuals cannot reasonably be
excluded from their use, and their consumption by one individual would
not interfere with consumption by another (e.g. national defense, park
services, public lighting).
6. Bird, R,”Subnational Taxation in Developing Countries: A Review of the 9. Freire, E.M and Hernando Garzon,”Managing Local Revenues”, 2013.
Literature”, PREM, the World Bank, Oct 2010 10. Bahl, R.”Implementable Rules of Fiscal Decentralization.” In
7. Bahl, Roy,”Property Tax Reform in Developing and Transition Countries” Development, Poverty and Fiscal Policy, edited by M.G. Rao, 253-77.
USAID, December 2009. New Delhi: Oxford University Press. 2002