Tax Administration versus Tax Rates: Evidence from Corporate Taxation in Indonesia
By M. Chatib Basri, Mayara Felix, Rema Hanna and Benjamin A. Olken, American Economic Review, vol. 111, no. 12, December 2021, (pp. 3827–71)
Abstract
We compare two approaches to increasing tax revenue: tax administration and tax rates. We show that when Indonesia moved top regional firms into “medium taxpayer offices,” with high staff-to-taxpayer ratios, tax revenue more than doubled. Examining nonlinear changes to corporate income tax rates, we estimate an elasticity of taxable income of 0.579. Combining these estimates, improved tax administration is equivalent to raising top rates on all firms by 8 percentage points. On net, improved tax administration can have significant returns for developing countries.
Excerpts
…The idea is that enhanced tax administration may make evasion and avoidance more difficult..
…Tax Administration Reform and the Introduction of MTOs.—Indonesia began
comprehensive reforms of its tax administration system in 2002, to improve fiscal balance in the wake of the 1997–1998 Asian Financial Crisis. This was the first year it transitioned to a modern, centralized IT system to handle all tax transactions. It also restructured the organization of its tax offices.The organizational reform had two main features. First, following typical practice worldwide (Lemgruber, Masters, and Cleary 2015), large corporate taxpayers were moved to centralized offices, with higher staff-to-taxpayer ratios to allow for more intensive followup. The largest 200 taxpayers nationwide would be serviced centrally by a large taxpayer office (LTO) based in Jakarta. Analogously, the top several hundred taxpayers in each region would be handled by a special MTO in their tax regions. All remaining corporate taxpayers, as well as all individual taxpayers, would be handled by the network of about 300 PTOs.10 We focus on firms serviced by MTOs and PTOs.11
Second, the office structure was also reformed. Prior to the reform, tax offices
were organized by tax type, such that taxpayers filed different taxes in different locations, and auditing was conducted by a separate network of audit offices (Brondolo et al. 2008)….Source
Basri, M. Chatib, Mayara Felix, Rema Hanna, and Benjamin A. Olken. 2021. “Tax Administration versus Tax Rates: Evidence from Corporate Taxation in Indonesia.” American Economic Review, 111 (12): 3827–71. DOI: 10.1257/aer.20201237
Featured image credit: Excerpt from Akiq AW, Indonesian family portraits series 2017, series of 18 inkjet prints https://digital.nga.gov.au/archive/contemporaryworlds/works.cfm%3Fwrkirn=326093.html
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