Another year, another attempt, another failure in collecting tax.

Despite numerous tweaks and improvements over the last two decades, Indonesia’s tax administration has failed to generate a sustainable and meaningful increase in tax revenue over and above the pre-2000 levels.

From conventional strategies — restructuring the organization, modernizing IT systems, developing data infrastructure — to high and risky moves like lowering tax rates, granting tax amnesties and offering tax incentives, all have been tried in the past 20 years. Yet, our tax administration is still performing poorly, is still a constant source of late-year anxiety for the government and is still a specter hanging over our economy.

So what is wrong in our tax administration?

Almost universally, the answer is low compliance. Compliance improvement has been the perpetual goal of the Indonesian government. It is at the heart of the International Monetary Fund-backed medium-term revenue strategy proposal of 2018, and the Organization for Economic Cooperation and Development (OECD) in 2018 called it “the key to durably raising revenue”.

What, then, should be done to improve compliance? A self-assessment regime like ours, where taxpayers pay the taxes they declare according to their own calculation, requires the tax administrator’s constant vigilance to ensure compliance.

Limited access to data, especially financial information, was blamed in the past as the main culprit of the inability of the Finance Ministry’s Directorate General of Taxation (DGT) in monitoring compliance closely. With the 2016-2017 tax amnesty and the enactment of the 2017 law on access to financial information, however, the tax authority has much wider access to third-party data, and it has even established a dedicated data and analysis unit. The DGT now has ample intelligence to monitor compliance.

Remarkably, tax collection still remains far below expectations three years later.

So perhaps the problem is not primarily lack of data and intelligence (resolved in 2017) or the complexity of administering taxes (Indonesia has climbed steadily in the paying taxes indicator of the World Bank’s Ease of Doing Business survey), or even our tax rates (roughly in line with other countries in the region and globally).

Perhaps the primary problem is more fundamental, in a way simpler and closer than expected — perhaps too close to be understood clearly.

A recent paper by lead author Chatib Basri, a former finance minister, provides an important clue as to the where the real problem lies. In their paper, Basri et al. found, inter alia, that moving firms to medium taxpayer offices (MTO) “more than doubled tax revenue from affected firms over six years, with increasing impacts over time”.

Some observers jumped at this finding and suggested that more firms be moved to MTOs. Some are convinced that establishing more MTOs will generate the desired increase in tax revenue. Basri himself, in a recent opinion piece (Kompas, Dec. 5), advised that corporate taxpayers be moved to MTOs to increase revenue without imposing additional burdens on taxpayers. This advice stems from his and his co-authors’ hypothesis of “enforcement tax”, which they postulate deters firms at small taxpayers offices (STOs) from pursuing higher growth. Once moved to MTOs, firms can more freely grow their businesses without fear of additional enforcement tax.

The more basic and important result of the Basri paper’s finding is, unfortunately, often neglected in most discussions. The single distinct feature of an MTO over a STO is the much higher staff-to-taxpayer ratio. Indeed, the result of Basri et al. can be restated as follows: Firms monitored by tax offices with more staff grow faster and generate more tax compared to firms monitored by tax offices with fewer staff.

It is little surprise, therefore, that Basri et al. have concluded that tax offices with higher staff-to-taxpayer ratios “may have been able to increase tax compliance while simultaneously reducing the tax-induced barriers to the firm’s growth”.

This, then, is the answer to our problem: to improve compliance and revenue collection, the government must increase the number of tax office staff.

But wait a minute: Does the DGT really lack employees? With more than 45,000 staff, the DGT is easily one of the biggest employers in Indonesia. Isn’t the solution simply to expand the MTO network?

The answer is “no” to the second question, and a firm “yes” to the first. Expanding the number of MTOs is a temporary patch, and the true solution is to make every tax office as highly staffed as the MTOs — or even more so.

With only 45,000 employees, the DGT serves more than a 180 million working age population, of which only 20 percent are registered taxpayers. This means that each DGT employee must monitor 4,000 taxpayers, not including corporate taxpayers. Compare this with the OECD average of 1:1,269, the average among OECD emerging market economies of 1:1917 or the non-OECD average of 1:3030.

To reach the non-OECD average, the DGT would need to recruit additional 15,000 employees. To get to the level of OECD emerging market economies, the DGT would need to double its workforce to 90,000 employees.

From a budgetary standpoint, the shortage of resources devoted to tax collection is equally clear: Indonesia only devotes 0.08 percent of gross domestic product to fund DGT operations, compared to 0.12 percent, 0.14 percent and 0.19 percent respectively in non-OECD, OECD emerging and OECD countries.

It's obvious that the DGT simply lacks resources to monitor compliance, raise optimal revenue and fund the various pressing government agendas from eradicating corruption to addressing the climate crisis.

Therefore, the first step in breaking the curse of the government revenue shortfall is simply to invest more in the DGT, specifically to expand its workforce.

With the current growth rate in DGT employees, it will take up to 10 years to get to the level of OECD emerging economies. Should we wait that long just to start catching up?

Can we afford another decade of revenue shortfall?

________________

Staff member at the Directorate General of Taxation of the Finance Ministry. The views expressed are his own.

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