Based on a new study by the Center for Economic and Law Studies (Celios), Indonesia can probably generate up to US$5 billion (approximately Rp 81.6 trillion) as extra yearly revenue by applying a wealth tax on the 50 richest people in the country. The initiative in question is merely a constituent of the broader fiscal reforms implemented to deepen the nation’s finances and lower the extent of economic inequality.
According to Celios, the tax-to-GDP ratio in Indonesia is surprisingly low, and over the last several years, it has been between 10 and 12 percent—this is significantly below the average for ASEAN countries, which is around 14-15 percent, and is also far less than in developed countries, where the figure is often more than 30 percent. The experts maintain that if the tax net is not broadened, Indonesia might find it hard to provide the necessities of life, keep up with infrastructure development, and fulfill its development goals.
The research shows that on the one hand, such a tax would generate an enormous new income stream, but on the other hand, it would also address the roots of the nation’s economic problems. A handful of super-rich people have the lion’s share of the country’s total assets, yet there are still millions living in poverty and at risk of economic insecurity. Even the government investment that comes from the redirected revenues of just a relatively small proportion of the wealth of these ultra-rich individuals could be a game-changer in the education, healthcare, and transportation sectors.
There are very different results from the simulations by multiple economic think tanks about what a progressive wealth tax applied to those with assets exceeding Rp 144 billion would raise. In some instances, the amount of money collected could be nearly half of Indonesia’s GDP, i.e., in other words, it can generate a huge amount of money, which in some cases could reach half a percent of the total GDP. The advocates of such targeted taxation hold that this is not only just in terms of the tax burden but is also efficient enough to show that the rich pay more into the progress of the country.
On the other hand, a wealth tax gives rise to hurdles in the way of its smooth execution. It is imperative to know the real value of assets; other important points are the prevention of tax evasion and allowing transparency in the distribution of funds, which will ensure the policy’s trustworthiness and effectiveness. Some opponents also suggest that heavy-handed taxing may scare away the eager investors; under such conditions, some may even move their money swiftly out of the country. However, their supporters reply that if the process is well thought out and the execution is gradual, then these setbacks can be easily overcome.
The government officials’ feedback to these recommendations made by Celios is that they are eager to consider, especially the measures that might increase the contributions of the high-income group. The conference reflects a broader acknowledgment of how far away from the final decision, Indonesia would have to look for new and viable revenue sources in this globally changing economy to be able to maintain a sound fiscal situation.
One of the implications is that if a wealth tax is properly executed, not only could it be an economic stabilizing means, but also a social equity instrument, which would, on one hand, allow Indonesia to have a more secure fiscal base and, on the other hand, make the gap between the richest and the rest of the population narrower. The challenge for the decision makers will lie in getting a system that would not only be able to access the unrivalled $5 billion but at the same time be able to keep the economy going without loss of confidence.
