T

he standard of living of the Indonesian middle to lower class has improved, but it pales in comparison with their compatriot billionaires and millionaires (in terms of American dollars).

The total wealth of Indonesia'€™s top-50 richest people amounted to US$101.7 billion in 2014 according to Forbes magazine.

This goes without mentioning those who are invisible, as the Organization for Economic Cooperation and Development (OECD) states that the Indonesian informal economy was more than 30 percent of GDP in 2012.

Despite the growing rich, tax revenues have been thin for years, accounting for only 11-12 percent of GDP, while the individual income tax rate is 30 percent.

The ratio of tax revenues to GDP in developed countries usually approaches the official income tax rate. The distance between these two is worryingly large in Indonesia.

It is detestable that the Indonesian inheritance tax rate is very low, at only 2.5 percent flat, despite the growing number of billionaires.

Inheritance tax rates can reach 50 percent in Germany and 40 percent in the Netherlands. Even the Philippines has a rate of 20 percent.

In Thailand, inheritance tax has ranged from 5 to 20 percent. The topic of heritance is sensitive because it involves emotions and religious values.

On the other hand, one should not lose sight of the fact that the tax is levied on the recipient and not on the dead.

This is fair because people cannot choose their parents.

In his book Capital in the Twenty-First Century, Thomas Piketty examines wealth and income inequality since the 18th century in Europe and the US.

He finds that the rate of return on capital has been greater than the rate of economic growth, causing the concentration and unequal distribution of wealth.

So no matter how hard the rabble work, they will never be in a position to overhaul the prosperity of those who inherit the capital.

This gives rise to social and economic instability. To address this inequality, Piketty proposes the redistribution of incomes through taxing wealth.

According to the 2008 Nobel laureate in economics, Paul Krugman, Piketty'€™s book is magnificent and may be very important for this decade, containing critical discourse and changing academic insights.

The 1987-nobel laureate Robert Solow has argued that in economic theory, Piketty is right and
has made a strong contribution to the classic topic of '€œthe poor get poorer and the rich get richer'€, a topic that is so relevant to Indonesia.

Income inequality can result in increasing crime as evidenced by the World Bank'€™s research on Mexico.

Researchers from the University of Tübingen '€” one of Germany'€™s most famous universities in the field of humanity '€” also concluded that greater wealth disparity led to a greater risk of civil war.

In Indonesia, income inequality is certainly a weak spot because of the ethnic differences across the country.

I believe there are two ways to achieve a more equitable distribution of wealth.

First, widening the scope of tax-objects. One example is to replace individual tax with income generated from fixed assets '€” such as interest and the lease of fixed assets '€” with tax on the net wealth system. This system has proved successful in the Netherlands since its implementation in 2001.

In this system, all forms of deposits in financial institutions and all assets that are not in use for your own purposes are taxed.

This includes vacant land wherever this is located; buildings and luxury items, which are only for collection; valuable antiques stored in the basement; and luxury cars in the parking lot for a hobby.

Then the sum of the market prices of the assets concerned are reduced by the total of all existing debt, except residential mortgages.

Then it comes to the net wealth of the tax payers. In the Netherlands, a fictitious yield of 4 percent is used and the official tax rate is 30 percent.

Net wealth taxation does not lead to double taxation on the earning of assets.

Interest income, the result of rent, the sale of assets and foreign exchange differences are not taxed. The advantage of net wealth taxation is that there is a fairer distribution of wealth.

Another advantage is that it is easier for the Indonesian tax office to carry out. Net wealth taxation can also be used by the Corruption Eradication Commission (KPK) and the Attorney General'€™s Office (AGO) to track corruption because in the net wealth taxation system, taxpayers must explain where the assets and debts come from.

Another fair example is to enforce the range or scope of inheritance tax over 20 years backward, especially on inheritance capital from the New Order era.

The second is implementing a progressive tax rate system. The implementation can be applied in the income tax regime and inheritance tax regime.

The rate climbs along with rising income. Many oppose this method. Empirical research has highlighted a negative correlation between tax rates and economic growth rates.

However, for Indonesia this argument is not valid. If law enforcement is effective, foreign investors will have more confidence about doing business in Indonesia.

If the healthcare system and education improves due to sufficient of public funds, the nation will create more competent human quality to compete in the world economy. It will all uphold economic growth.

However, the level of rates should be optimal and should not hamper domestic capital flows for domestic investment.

These recommendations should be ideally applied sooner as the new government is in need of
funds for economic reform and certainly before the billionaires become stronger and join forces to lobby politicians for not implementing these proposals.

Last but not least, the Indonesian tax office should be more capable of collecting taxes.

German and Dutch tax inspectors are both feared and highly respected. Indonesian tax inspectors should aspire to gain this reputation.