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Jakarta Post

EDITORIAL: Addressing income inequality

  • EDITORIAL

    The Jakarta Post

Jakarta   /   Mon, April 2, 2018   /   07:54 am
EDITORIAL: Addressing income inequality Beggars in Indonesian capital city Jakarta. (Shutterstock.com/Daxiao Productions)

The title of the World Bank’s first Indonesia Economic Quarterly Reports for this year, “Towards inclusive growth”, fits well with the landscape of inequality in our income distribution and wealth ownership, which, although it has declined slightly to 0.39 on the basis of the Gini coefficient, has remained among the highest in Asia.

This inequality issue could be overly exploited by narrow-minded politicians to mislead the public about the real problems, even at the risk of stirring social conflict.

But as long as the tax ratio (revenues in proportion to gross domestic product, or GDP) cannot be raised from its present level of 10 percent, among the lowest in the region, and way below the 15 percent threshold level needed to stimulate growth, the rate of reduction in inequality will remain very low.

Hence, the World Bank’s main policy recommendation that Indonesia should collect more and spend better to accelerate the pace of inclusive growth is quite strategic.

The theme “collecting more and spending better” happens to be related mainly to fiscal management, the main task of the Finance Ministry. But while Minister Sri Mulyani Indrawati fully agreed with the World Bank recommendation, she acknowledged the complex, uphill challenges.

Significantly raising tax collection is nearly impossible as long as the tax system and institutional capacity of the tax office is not improved. However the House of Representatives seems to have no sense of urgency to start deliberating the four pieces of bills on the general tax system, income tax, value-added tax and local administration tax levies.

The most the Finance Ministry can do now is to improve the institutional capacity of the tax administration through information technology and a broader and accurate database.

The law that now gives tax officials access to the financial accounts of taxpayers helps detect tax evasion, but the achievement would still be incremental.

This is because the structure of personal (individual) income tax is lopsided in favor of the upper-middle income and top rich taxpayers, as the highest rate (30 percent) is applied to an annual income of Rp 500 million (US$36,500) and more, while many corporate executives, including those in state companies, may earn between Rp 2 to 5 billion. Those with big financial assets can even net personal incomes to the tune of tens of billions. But those who earn Rp 250 million are already subject to the 25 percent tax rate.

But the task of spending better, as set by the World Bank, is not less challenging. As Sri Mulyani noted, allocating bigger appropriations to health, education, social assistance, rural and urban infrastructure to reduce inequality is not by itself the final solution.

Bigger appropriations would be ineffective if the design of the approriations is not right and fits with the actual need and the institutional capacity of the line ministries in charge of implementing them.

Even the institutional capacity of the line ministries still varies widely, let alone that of the 545 local regental and municipal administrations.