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Why Indonesia should raise the income tax of the ultra-rich individuals

The Conversation - May 11, 2021

Nurhastuty K. Wardhani and Asmiati Malik – Indonesia, Southeast Asia's largest economy, could maximise its tax revenue by increasing the income tax for wealthy individuals – those with a net worth exceeding US$1 million or Rp 14.2 billion – that continue to grow in number every year.

This could help Indonesia tackle the country's Rp 553.09 trillion state deficit due to the ongoing spending of the National Economic Recovery budget, used to contain the coronavirus outbreak.

Last year, the country had its first recession since 1998. Its tax revenue only reached 89,25% or Rp 1.019,56 trillion last year, slipping 10% from the Rp 1.198,8 trillion target.

Research shows that increasing the tax for the super-rich can help increase tax revenue while redistributing wealth and lessening income inequality.

Growing wealth and inequality

Despite the COVID-19 pandemic, the number of wealthy people continues to increase, fuelled by the recovering economy.

A recent study by Knight Frank, a consultancy company based in London, predicts that there were 21,430 high net worth individuals, or people with a wealth of more than US$1 million in 2020 in Indonesia. This number will increase by 110% to 45,063 people by 2025.

Additionally, the report states that in 2020, there were 673 people in the category of ultra-high net worth individuals, those who have net worths of more than US$30 million (Rp 434,5 billion). The number of ultra-high net worth people is projected to increase by 67% to 1,125 people in 2025. Indonesia is going to have the fastest-growing number of ultra-high net worth individuals in Asia.

Another list by Forbes includes 15 Indonesians in the top 100 wealthiest families globally.

Yet, Indonesia still faces many problems in eradicating poverty, which has climbed to a three-year high due to the pandemic.

There were 27.55 million poor people in September last year, or equal to 10.19% of the population. Indonesia's Gini coefficient also climbed from 0.3 in 2000 to 0.4 in 2015, indicating rising inequality in terms of the income distribution.

Currently, Indonesia is the sixth country with the greatest wealth inequality globally – the four richest men in Indonesia hold wealth larger than the poorest 100 million people combined.

This widening income inequality gap will threaten the quality of democracy in Indonesia and social stability in the future. According to European Journal of Political Economy, stability of democracy depends on income equality.

A recent survey found that most of the Indonesian population already supports taxing the ultra-rich.

Tax is a powerful tool to redistribute wealth

Tax is a powerful tool to reduce income inequality and redistribute the wealth from the rich to the poor. However, Indonesia's tax income still has a long way to go before achieving this outcome.

The country's tax to GDP ratio is meagre (10.8% in 2018) compared to other emerging countries and is even the lowest among Southeast Asian countries.

Countries like Singapore and Malaysia have a tax-to-GDP ratio of 13.2% and 12.5% respectively in 2018.

One of the components of the national tax revenue is the personal income tax. Surprisingly, the proportion of the personal income tax is roughly ten per cent from the total revenue of tax according to The Organisation for Economic Co-operation and Development (OECD) 2020. Moreover, personal income tax has only changed slightly in the last thirty years, especially in developing countries.

For instance, the personal income tax in Indonesia currently constitutes only around 10% of total tax receipts.

Currently, Indonesia only charges 30% income tax for people with an income of more than Rp 500 million per year.

Other countries such as Japan and Sweden can charge up to around 60% for their citizens' income tax. The United States (US) President, Joe Biden, also recently announced a proposal to raise capital gains taxes on people who make more than US$1 million a year.

This means that there is still room for Indonesia to gradually increase the maximum income tax to 45% or even 50%.

The parliament needs to prepare a new bill to tax the wealthy Indonesians – one that targets the top one per cent, especially those holding income and wealth that is disproportionately larger than most other individuals in the country.

Due to Indonesia's current economic downturn amid COVID-19 and the high disparity of income prevalent in the country, now is the right time for the government to consider a new tax for the super-rich.

[Nurhastuty K. Wardhani is a faculty member, Trisakti University. Asmiati Malik is an adjunct assistant professor, Universitas Bakrie.]

Source: https://theconversation.com/why-indonesia-should-raise-the-income-tax-of-the-ultra-rich-individuals-15981