T

he Directorate General of Taxes (DGT) operates in a difficult climate. Indonesia is widely known to have an unfavorable atmosphere in terms of corruption.

For example, the Worldwide Governance Indicator from the World Bank Institute cites Indonesia'€™s low performance on the Control of Corruption indicator.

The Corruption Perception Index published by Transparency International depicts a similar picture. This indicates that in Indonesia, non-compliance with the law may be quite extensive.

In 2007, Fisman and Miguel published an article describing their analysis of parking violations committed by diplomats at the UN headquarters in New York.

Until 2002, these diplomats were protected by diplomatic immunity against parking violations.

In case you were wondering, Indonesia ranked number 24 in the list of top offenders, which was worse than Thailand or Bangladesh.

They demonstrated that parking violations were positively correlated to the corruption index. These researchers showed that a decrease in a home country'€™s corruption index was associated with a decrease of approximately 80 percent in parking violations.

When the City of New York decided to take away the diplomatic license plates for those who accumulated more than three unpaid parking violations, there was a significant decrease by as much as 98 percent in parking violations.

Fisman and Miguel concluded that first, there is evidence that cultural factors related to corruption are associated with diplomats: Even though they are not in their home countries, they still carry on their old behavior from home.

Second, enforcement is important. On the other hand it is possible that those who display evidence of a corrupt culture can gradually change if they are put in a significantly less corrupt place.

In an article that appeared in the Harvard Business Review, Dan Ariely pointed out that most people '€” when tempted '€” will likely cheat regardless of the risks.

He discovered that people have quite a good ability to rationalize cheating if it involves non-monetary exchanges, such as tax reporting. He further found that even if the probability of detecting such illicit behavior is nil, people usually have a conscience that limits them from becoming complete liars.

Looking at these results, it can be clearly seen that the DGT faces a heavy challenge. This office relies on the willingness of taxpayers to comply with tax laws to generate tax revenue.

However, Indonesia is clearly not an ideal place for that, if we are to rely on Fisman and Miguel'€™s findings. Hoping all taxpayers will dutifully comply with tax laws is like expecting a moth to reach the moon.

As shown by Ariely, people tend to be clever in providing rationales for non-cash cheating such as tax reporting. To curb cheating, the only measure left for this office in the short run is law enforcement.

Studies have revealed that strong law enforcement can lead to improved taxpayer compliance. Unfortunately, enforcement is generally expensive and requires a large amount of resources.

Third, in the long run, improving compliance needs concerted efforts. The current DGT'€™s outreach programs mostly involve sporadic activities. More intensive campaigns usually take place near the deadline for annual tax return filing, in the form of providing assistance in filling out the tax return forms.

While these may be beneficial, it may not help improve compliance significantly in the long run.

For this, more systematic measures need to be carried out involving other parties '€” such as schools and universities for future taxpayers '€” and other professional organizations '€” such as accountancy bodies or medical associations for current taxpayers.

Fourth, corruption needs to be taken into account. Corruption clearly reduces tax revenue, causes undesirable effects on fiscal sustainability and deters investment. It is contagious too.

An honest person can suddenly be corrupt if he sees that he lives in a place where corruption is tolerated. If he happens to work at the tax office, then such behavior clearly affects taxpayer compliance because it reduces taxpayer'€™s trust.

A low trust '€” defined as a general perception that the tax officials do not genuinely act in the public interest '€” leads to lower voluntary compliance, which is the heart and soul of our tax administration system. Further, when corruption is rampant, a taxpayer may view evasion as worthwhile because the probability of being caught (by honest tax officials) is low.

The more widespread corruption is, the higher the incentives for other taxpayers to join the evasion game.

Hence, corruption can only lower compliance. And lower taxpayer compliance definitely lowers revenue. To reduce corruption is to revive a tax system that is rational, equitable and simple. Then tax officials need to be streamlined and familiarized with acceptable behavior, which could then be followed by an increased salary.

In conclusion, the DGT faces enormous tasks in improving compliance. In the short run, it is in urgent need of expanding its capacity to detect non-compliance.

Strong enforcement does count. In the long run, it needs to improve its outreach programs. For this, concerted efforts need to be systematically carried out. Lastly, corruption has to be curbed as it undermines efforts to improve voluntary taxpayer compliance.
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The writer is a trainer at the Taxation Training Center of the Finance Ministry. The views expressed are his own.