10.1. Role of Tax in The Government and Economy

The Government has the right to collect taxes

Role and Function of TaxSource of fund finance government

activities and developmentInstrument to manage national economy fiscal policy, tariff policy, etc

Instrument to maintain economic fairness

12.2. Types of TaxationTaxes on earnings

payroll taxTaxes on individual income

capital gain taxTaxes on corporate incomeTaxes on wealth

property tax, estate (inheritance tax)Taxes on consumption

sale tax, excise tax

12.3. Desirable Characteristics of Any Tax System

Economic efficiencyAdministrative simplicityFlexibilityPolitical responsibilityFairness

12.4. Economic Efficiency Tax system

should not distort, but promote economicefficiencyBehavioral effect of tax

all taxes affect behavior (reduce spending) tax affects on such as work behavior, savings, and investment

Corrective tax e.g. pollution tax (raises government revenues,

and improve economic efficiency)

12.5. Administrative Simplicity

Tax system ought to be easy, and relatively inexpensive

Factors affecting administrative cost of tax systemrequired recording systemcomplexity of the system

12.6. FlexibilityTax system should allow easy adaptation to changed

circumstances Changes in economic conditions change in tax rates

Speed of adjustmentsautomatic, or slow

Political constraints of adjusting rates

14.7. Political responsibilityTaxes system held accountable to the public transparent

12.8. FairnessThe tax system should be fair treating those in similar circumstances similarly (horizontal equity) imposing higher tax on those who can better bear the burden of taxation (vertical equity)

12.9. Practice of Taxation in Indonesia

Introductory NotesTax as source of fund for national

developmentIncreasing tax revenue to reduce

dependence on overseas loan for funding national development

Tax revenues increases overtime, yet, still not sufficient

Tax evasion is common place

Types of Tax Income Tax (PPh)Value added tax (PPn)Luxurious good tax (PPnBM)Land and building tax (PBB)Excise Import dutiesExport taxOther kind taxes, such as pollution tax,

retribution

Constraints to Increase Tax RevenuesLow average income per capitaUnemployment and povertyBad public awareness for paying tax Corruption Economic inequality Tax administration system expensive and

lack in public accountability

12.8. References (1)Gruber, Jonathan. 2005. Public Finance and

Public Policy. New York: Worth Publishers. Chapter 18

Stiglitz, Joseph E. 2000. Economics of the Public Sector. New York, USA: W.W. Northon and Company. Chapter 17.

Reksohadiprodjo, Sukanto. 2001. Ekonomi Publik. Yogyakarta: BPFE. Bab 8-12

12.8. References (2)Badan Pendidikan dan Pelatihan Keuangan,

Departemen Keuangan Rep. Indonesia. 2004. Dasar-Dasar Keuangan Publik. Jakarta: Badan Pendidikan dan Pelatihan Keuangan, Departemen Keuangan Rep. Indonesia. Bab 13-21.