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Time to reform tax injustice favoring the rich
The current treatment of capital gains therefore benefits mainly the rich.
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Two women hold up newly released banknotes at a Bank Indonesia representative office in Riau Islands, Batam, on Dec. 19. (Antara/M N Kanwa)
W
hen we talk of policies for improving social justice, what we usually mean are things such as building hospitals, roads, schools and other basic infrastructure, as well as cash transfers to the poorest segments of the population.
While all of the above are necessary, we must not forget that these policies, which mainly target the poor, are not complete. To address the growing cancer of inequality more directly, swiftly and decisively, the government must complement its use of transfer systems with appropriate policies in the tax system.
To reduce inequality is to limit the degree of wealth concentration. The World Bank has estimated that in Indonesia, 1 percent of the population owns 50 percent of the wealth of the country. But how does wealth get concentrated in the first place and grow to this massive and hideous level? Ruling out illegal practices, there are two steps to wealth concentration: accumulation and conservation.
The rich grow richer by utilizing their assets to produce passive income, that is income generated by the simple fact of owning the assets — no, or minimal work required. This category includes dividends, interest, rent, royalties and capital gains.
Since ownership of assets is the prerequisite to building financial fortunes, then only the rich can sustain, grow and expand their wealth. This is the accumulation phase.
After accumulating so much beyond their capacity to spend, the rich will eventually pass on the wealth to their offspring, usually upon their death as inheritance.
This second step is the conservation phase in which the already wealthy or at least well-off children inherit their parents’ accumulation of wealth, therefore ensuring that the concentration of wealth continues across generations.
