Page 5 - Working Paper (Fiscal Decentralization and Sub-national Taxes: Specific Case of Indonesia)

DDTC Working Paper 1015
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subsequent over reliance on transfers make local Table 3 - Criteria for Tax Incidence
governments fiscally lazy and reduce spending 1) Equity and Fairness: Taxpayers should be taxed
efficiency and accountability. equally
2) Certainty: Tax rules should clearly specify such
The recent decentralization of the urban
as when tax is to be paid, how it is to be paid and
and rural property tax to Indonesian regional
how to be determine the amount that needs to be
governments has the potential to strengthen
paid
fiscal capacity of the regions. But property tax
decentralization is not proceeding smoothly. As 3) Convenience of Payment: A tax should be due
of 2012 only Surabaya has successfully taken on at a time or in a manner that is most likely to be
responsibility for administering taxes related to convenient for the taxpayers.
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property and property title transfer . By the end of 4) Economy: The cost of collection should be kept
2013, which is the deadline for local governments minimum
to assume control over the relevant taxes, only 5) Simplicity: The tax law should be simple so that
a small number of additional, mostly large taxpayers understand the rules and should comply
municipalities are expected to be actively collecting with them correctly
the tax. The vast bulk of subnational governments
will apparently not assume administrative 6) Neutrality: The effect of the tax law on taxpayers’
responsibility for the property tax before the decisions as to how to carry out a particular
deadline and collection of the tax may well be transaction or whether to engage in a transaction
discontinued in those places. This would represent should be kept to a minimum.
a significant missed opportunity to increase own- 7) Economic growth and efficiency: The tax system
source revenues and enhance spending efficiency should not impede or reduce the productive
and accountability. According to Bird (2001), capacity of the economy.
8) Transparency and Visibility: Taxpayers should
Table 2 - A Recommended Local Tax
know that a tax exists and how and when it is
1) Tax base should be immobile, so that sub- imposed upon them and others.
national governments can vary the tax rate without 9) Minimum tax gap: a tax should be structured to
the taxable base moving somewhere else. minimize noncompliance
2) The tax yield should be adequate to meet local 10) Appropriate government revenues: The tax
needs, be stable, and be predictable. system should enable the government to determine
3) Tax base should not be easy to export to how much tax revenue will likely be collected
nonresidents.
Source: Bird, Richard. 2001. “Setting the Stage—Municipal and Intergovernmental
4) Tax base should be visible to ensure Finance.” in Challenges of Urban Governments, edited by M. Freire and R. Stren.
Washington, DC: World Bank Institute.
accountability.
5) Taxpayers should perceive the tax as fair. property tax is a good local tax because the base is
6) The tax should be easy to administer immobile and the tax is visible; although, it requires
technical capacity and political commitment. Much
Source: Bird, Richard. 2001. “Setting the Stage—Municipal and Intergovernmental
Finance.” in Challenges of Urban Governments, edited by M. Freire and R. Stren. progress is still needed especially in developing
Washington, DC: World Bank Institute.
countries, where the property tax represents a
very small proportion of tax revenue and where
the infrastructure for setting up a property tax is
targeted and preferable local taxes have several
often not in place. There are some drawbacks of
features which are shown below. 13
property taxes such as
Furthermore, according to American Institute of
• The high cost of accurate valuation of property
Certified Public Accountants (2013), tax incidence 14
values ;
should follow some criteria such as shownin Table
• The political difficulty of enforcement;
3.
• The apparent inelasticity of property values with
Most of locally own-source revenue in respect to GDP or national income (property
Indonesia comes from the property and business values respond less quickly to changes in GDP
12
tax . However, in other countries, sales as well as than income or sales)
income taxes also apply locally. As stated above,
• The fact that few jurisdictions update property

11. Ibid. 13. Op.cit, Freire, E.M and Hernando Garzon, 2013.
12. In developing countries, property taxes seldom account for more than 14. Tax base is valued based on, to name a few: rental value, capital
20 percent of local current revenues- or less than 1 percent of total public value of land and improvements, land value, and physical area. Most
spending (Bahl and Martinez-Vazquez, 2007). countries utilized toward capital value of land and improvements.