T

he government'€™s aspiration for tax forgiveness aimed at repatriating funds that have been lodged overseas reminds us of what Martin Luther King once said, '€œForgiveness is not an occasional act, it is a constant attitude.'€ Let'€™s us imagine what would happen if the government constantly granted tax forgiveness.

Those who have been voluntarily tax compliant for a long time might be discouraged from continuing such a civic obligation. Investors and public would have further doubts in the government'€™s capability to improve law enforcement. It would be difficult to restore confidence in the government'€™s ability to collect tax revenues in the long run.

To put it bluntly, a tax forgiveness policy would undermine the objective of improving the fundamental tax administration system.

Based on data from the US National Bureau of Economic Research, out of the 46 US states that have run a tax-amnesty program, 35 have undertaken multiple offerings, with four states running as many as five iterations. Other research was undertaken by Oxford University using the data of tax amnesties from US states between 1981 and 2011. Their empirical findings suggest that the likelihood of tax forgiveness is mainly driven by a government'€™s fiscal requirements and the taxpayers'€™ expectations of future forgiveness.

This initially reduces tax revenues, and in turn reinforces the government'€™s need to enact future forgiveness. According to the research, in the long run the revenue raised by tax-amnesty programs may be modest and should be a warning to the fiscal authorities experimenting with tax forgiveness to obtain quick windfall revenue gains. The benefits of a tax forgiveness policy are also insignificant.

Research initiated by Georgia State University analysed the impact of the amnesties on tax collection in the Russian Federation during its main transition period of the 1990s. The research concluded that the Russian tax amnesties, like most other amnesties, seem unlikely to have had significant positive '€” or negative '€” impacts on the revenues of the Russian Federation.

The conclusion calls into question tax amnesties'€™ usefulness as a tax policy instrument. While tax forgiveness has high absolute levels of revenue collection, it only represents a small fraction of annual tax collection, on average 0.70 percent in the USA of the tax revenue collected.

Having argued the point of view above it is however acknowledged that Indonesian tax collection enforcement has been weak. Quoting from the latest data of the '€œ2015 Index of Economic Freedom'€ the percentage of tax revenues is small representing about 11.9 percent of gross domestic product (GDP) compared to neighbouring countries and Brazil at 12'€“35 percent. In advanced countries, the ratio is larger, approximately 30'€“40 percent.

I believe that the government should focus on enhancing fundamental tax collection instead of using exotic ways to treat pain temporarily. Therefore, six steps should be undertaken to achieve tax revenue collection of 30 percent or more of GDP without disrupting the capitalist system.

The first step is to strengthen the internal organization and human resources at the Taxation Directorate General. The government should comprehend that diversity promotes creativity and heterogeneous groups have been proven to produce better solutions to problems and a higher level of critical analysis. Therefore, the Taxation Directorate General should be released from the shackles of group thinking and experts from the private sector should be brought in, such as academics and top tax consultants.

The requirement should be based on skills and integrity rather than quantity. Subsequently, there should be a separation of functions. The Directorate of Inspection and Directorate of Collection should be split up.

According to Prof. Dr. MWC Feteris, who is now the president of the Dutch Supreme Court of Taxation, separation of the two functions makes sense because of differences in regulations, and specialization requires specialization '€” especially how to chase tax claims abroad '€” and moreover separation is unavoidable in the interest of internal controls.

Step two, for the medium and long term the government should replace the personal income tax system concerning interest income and other fixed incomes from privately owned assets. Instead, fictive yields over the net value of assets should be taxed. The net value refers to the difference between all privately owned personal assets and all debts excluding for own use.

We can call this the net worth tax system. In the Netherlands they use a fictive yield of 4 percent and a tax rate of 30 percent. This system does not cause double taxation because the real results of the assets are no longer subject to taxation. The advantages of the system are fair distribution of wealth (diminishing inequality) and it is cheaper for the Taxation Directorate General to execute.

Step three is the maximization of inheritance tax. The current rate is bewilderingly low at 2.5 percent flat, while the growth rate of new millionaires (in US dollar terms) in Indonesia continues to soar. The rates can amount to 50 percent in Germany and 40 percent in the Netherlands. In the Philippines the rate can be as high as 20 percent and in Thailand the inheritance tax bill was approved in May with rates of between 5 and 10 percent.

Step four is to deal with what Albert Einstein noted: '€œThe hardest thing in the world to understand is income tax.'€ Especially for ordinary people, filling in income tax returns can be complex. Therefore, the process of tax returns should be as easy as possible so that the tax office can be more efficient and effective in collecting tax revenues.

The government should be willing to invest in a modern IT system. In advanced economies, it is by law that most tax returns including payroll withholding tax are submitted through electronic delivery via the Internet.

Step five, the government should demand financial institutions and state agencies, which record the assets of taxpayers, provide the value of those assets at year end to the tax office. This may be considered a violation of privacy laws in banking. However in countries where the rule of law and human rights protection are excellent, providing such data is not unusual.

For instance in the Netherlands, the tax office collects the data from relevant financial institutions, employers and state agencies. Subsequently, the taxpayers can login on the tax office'€™s website and submit their tax return without paperwork.

Step six is applying '€œhorizontal monitoring'€. The head of the Taxation Directorate General often complains in the media that his organization is short-staffed. That traditional problem has occurred in other countries as well, including in the Netherlands. The phenomenon will continue as taxation is part of politics.

The elemental question is then how to achieve optimal tax revenues given the existing staff size. Horizontal monitoring can be a promising strategy. Horizontal monitoring has been accepted by the corporate sector as business-as-usual in the Netherlands. The Dutch tax office bases this strategy on the fundamental philosophy of taxation '€œtrust when possible, repression when necessary'€.

In the horizontal monitoring agreement, the public (business and corporate sectors) should trust the Taxation Directorate General, as this organization is the spear of civilization. The Taxation Directorate General gives inputs of design on the tax administrative process flows and tax control framework within the organization of the institutions. The system is periodically audited by external auditors.
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The writer, who has worked in the Dutch banking sector since 1998 as a credit analyst and accountant, is now a credit risk portfolio analyst at DHB Bank in Rotterdam, the Netherlands.