The Analysis of Income Inequality before and after 2008 Indonesian Personal Income Tax Reform* Bimo Wijayanto (bimo.wijayanto@natsem.canberra.edu.au) National Center for Social and Economic Modelling (NATSEM), University of Canberra Workshop on Contemporary Issues on Inequality in Developing Countries: Lessons from Indonesia NATSEM seminar rooms 1&2, Building 24, University of Canberra Tuesday, 24th May 2011 (9am-3pm) * First initial draft For discusssion only Not for quotation
1. Introduction 1.1. a. Purpose of Taxation-General Theory Revenue side- state budget (budgetair) Regulatory (regulerend) Stability Income redistribution function 1.1. b. Purpose of Taxation- Indonesian Income Tax Law Securing state revenue, Simple and stable tax system Neutral, transparent and fair law
2. Overview of Taxation in Indonesia 2.1. Contribution of Tax Revenues 1980, 1990, 2005-2009 Description Average 1980's Average 1990's 2005 2006 2007 2008 2009 Average 2005-2009 Share of Oil & Gas Revenue to Domestic Revenue (%) 54.35 27.05 29.40 32.61 24.99 30.71 20.28 27.60 Share of Tax to Dom Revenue 39.51 64.00 70.26 64.32 69.53 67.26 74.06 69.09 Share of Income Tax to Tot Tax 37.43 26.09 28.43 26.05 27.54 25.58 30.90 27.70 Income Tax to GDP Ratio (% to GDP) 2.71 4.88 6.33 6.25 6.04 6.61 5.96 6.24 Tax to GDP Ratio (% to GDP) 7.35 10.75 12.51 12.25 12.43 13.30 12.02 12.50 Source: DGT and DG Budget, Ministry of Finance, The Republic of Indonesia, 2010 2.2. Share of tax revenue and detail of income tax revenue Land and Building Transfer Duties 0.96% Land and Building Taxes 3.61% Customs and Excise Revenue 8.43% Other Taxes 0.47% Import Duties 2.78% Export Duties 0.08% Oil and Gas Income Taxes 7.44% Income Tax Art 26 6.75% Final and Fiscal Income taxes 12.23% Other Income Taxes 0.01% Personal Income Tax Art 21 18.79% Income Tax Art 22 1.58% VAT and Luxury Goods Taxes 35.00% Non Oil and Gas Income Taxes 41.22% 2009 Corporate Income Tax Art 25/29 46.58% Income Tax Art 22 Import 6.93% 2009 Income Tax Art 23 5.93% Personal Income Tax Art 25/29 1.21% Source: DGT and DG Budget, Ministry of Finance, The Republic of Indonesia, 2010
3. Background & Context to Indonesian Income Tax Reform Change in income threshold & MTR for PIT since 1983 No Income Tax Law Income Groups Tax Rate 1 No 7 Year 1983 Income 10,000,000 15% 10,000,000 < Income 50,000,000 25% Income > 50,000,000 35% 2 No 10 Year 1994 3 No 17 Year 2000 4 No 36 Year 2008 Income 25,000,000 10% 25,000,000 < Income 50,000,000 15% Income > 50,000,000 30% Income 25,000,000 5% 25,000,000 < Income 50,000,000 10% 50,000,000<Income 100,000,000 15% 100,000,000<Income 200,000,000 25% Income > 200,000,000 35% Income 50,000,000 5% 50,000,000 < Income 250,000,000 15% 250,000,000<Income 500,000,000 25% Income > 500,000,000 30% Source: Author s Compilation from several Income Tax Laws & Regulations, 2010
4. Scope of Study 4.1. Research Questions How have the changes in income tax legislation in Indonesia, more specifically 2008 reform, affected the Indonesian PIT revenue, the distribution of income and tax burden among Indonesian personal tax payers? 4.2. Objectives and Contributions 1. Initial trial to build a database and to develop a static PIT microsimulation model which will be reliable to answer research questions around the impact of PIT reform. 2. Powerful tool to support Indonesian tax authority to analyse the impact of policy reform. 3. So far there is still very limited analysis using microsimulation to analyze the distributional and revenue impact of income tax reform in Indonesia; this current empirical analysis aims to fill the gap in the knowledge.
5. Empirical Framework 5.1. The use of Microsimulation Static Microsimulation - Cross section information on individuals or firms - Static Ageing: reweighting and up rating - Immediate/morning after impact - Assume constant behavioral response Microsimulation Model - Panel dataset information on Behavioural/Dynamic Microsimulation individuals or firms - Dynamic Ageing - Usually incorporate behavioral response
5. Empirical Framework 5.2. Base file construction BPS, SAKERNAS 2008 Reweight Identify salary and non salary earners (taxpayers & non taxpayers) Identify and Allocate possible dependent to each salary earner in the household Status Dependent Non Tax Inc (Rp) Not Married 0 13,200,000 Not Married 0 14,400,000 Married 1 15,600,000 Married 2 16,800,000 Married 3 18,000,000 Generate non-taxable income based on old law Generate non-taxable income based on new law Status Dependent Non Tax Inc (Rp) Not Married 0 15,840,000 Not Married 0 17,160,000 Married 1 18,480,000 Married 2 19,800,000 Married 3 21,120,000 Income Bracket (Rp) Rate (%) - below threshold - grossinc = tinc Formula - 0-25 million 5 grossinc = ((netinc -5%*nontaxinc)/(1-5%)) - 25-50 million 10 grossinc = ((netinc -1,250,000-10%*nontaxinc)/(1-10%)) - 50-100 million 15 grossinc = ((netinc -3,750,000-15%*nontaxinc)/(1-15%)) - 100-200 million 25 grossinc = ((netinc -13,750,000-25%*nontaxinc)/(1-25%)) - 200 million more 35 grossinc = ((netinc -33,750,000-35%*nontaxinc)/(1-35%)) grossinc = gross income netinc = annual net income nontaxinc = non taxable income Grossing-up income based on old law Grossing-up income based on new law Income Bracket (Rp) Rate (%) - below threshold - grossinc = netinc Formula - 0-50 million 5 grossinc = ((netinc -5%*nontaxinc)/(1-5%)) - 50-250 million 15 grossinc = ((netinc -5,000,000-15%*nontaxinc)/(1-15%)) - 250-500 million 25 grossinc = ((netinc -30.000.000-25%*nontaxinc)/(1-25%)) - 500 million more 30 grossinc = ((netinc -55,000,000-30%*nontaxinc)/(1-30%)) grossinc = gross income netinc = annual net income nontaxinc = non taxable income Merge Final Micro Basedata
5. Empirical Framework 5.3. Estimation process Final Micro Basedata Gini Calculation y = gross income individual taxpayer f = individual rank in population N Tax Calculator: Monthly Salary/Wages Income Sakernas (I)*12=Annual Net Income (W) (s0) Taxable Income (TI)(s0)=Annual Net Income(W)-Personal Exemption(PEx) (s0) Tax Liability (TL)(s0)=Taxable Income(TI)(s0)*Marginal Tax Rate(MTR)(s0) Tax Burden (TB)(s0)= TL(s0) Annual Net Income (W) G and Tax Burden (TB)(s0) over Income Deciles using Taxpayers Frequency Policy Simulation: PEx MTR
6. Available Survey and Administrative Data 1. Fitness for purpose 2. Limitations 3. Data research questions 4. Benchmark against international practice Available Data 1. Indonesian Socio-Economic Survey, Susenas 2008 2. Indonesian Family Life Survey 4, IFLS4 2007-2008 3. Indonesian Labour Force Survey, Sakernas 2008 4. Personal Income Tax Return Module 2008
7. Results and Discussions 7.1. Revenue and Distribution Impact Income Decile Income Tax Revenue and Tax Burden Simulation by Income Decile using frequency of taxpayers, SAKERNAS AUGUST 2008, Comparison of the application of Law 17/2000 and Law 36/2008 (Gross Income and Income Tax denominated in Billion Rupiahs) Gross Income % Income Tax % Previous Law New Law % Tax Burden *) Gross Income % Income Tax % Tax Burden *) Income Tax Change % Tax Burden Change 1 25,681.52 6.68% 119.94 0.71% 0.0030 3,038.30 0.89% 15.79 0.14% 0.0028-87% -0.02% 2 25,611.42 6.66% 221.66 1.31% 0.0073 15,303.92 4.49% 43.02 0.38% 0.0026-81% -0.47% 3 23,229.30 6.04% 261.03 1.54% 0.0109 20,180.99 5.92% 89.21 0.79% 0.0045-66% -0.64% 4 24,542.83 6.38% 358.08 2.11% 0.0143 22,876.23 6.71% 189.76 1.68% 0.0080-47% -0.63% 5 28,120.14 7.31% 490.26 2.89% 0.0177 27,248.80 8.00% 308.66 2.73% 0.0116-37% -0.61% 6 33,603.47 8.74% 698.15 4.12% 0.0211 33,206.10 9.74% 499.05 4.41% 0.0154-29% -0.57% 7 35,565.44 9.25% 878.46 5.18% 0.0246 35,315.77 10.36% 680.04 6.01% 0.0196-23% -0.50% 8 42,151.59 10.96% 1,193.03 7.03% 0.0283 41,916.58 12.30% 962.40 8.50% 0.0236-19% -0.47% 9 51,776.22 13.47% 2,078.21 12.25% 0.0346 51,254.07 15.04% 1,584.49 14.00% 0.0281-24% -0.65% 10 94,180.97 24.50% 10,660.55 62.86% 0.0681 90,466.58 26.54% 6,945.50 61.37% 0.0477-35% -2.04% Total 384,462.89 100.00% 16,959.37 100.00% 0.0441 340,807.34 100.00% 11,317.90 100.00% 0.0332-33% -1.09% Sources: own preliminary simulation *) is mean of tax burden which is calculated for each individual tax burden in the income decile Total tax burden = total income tax liability total (gross income*weight individual)
7. Results and Discussions 7.2. Income Inequality All Observations Taxpayers Only Taxpayers and Non Taxpayers Sources: own preliminary simulation Gini before reform after reform Change 0.31499 0.29239-0.0226 0.48036 0.47957-0.00079
7. Results and Discussions 7.3. Change in tax basis Number of eligible taxpayers after the application of Law 17/2000 using SAKERNAS 2008 No of Potential Taxpayers Income Group (Law 17/2000) % from Total Salary Earners Law 36/2008 using SAKERNAS 2008 No of Potential Taxpayers Income Group (Law 36/2008) % from Total Salary Earners 0 43,000,000.00 70.85% 0 47,050,682.00 77.52% 1 15,000,000.00 24.72% 1 13,000,000.00 21.42% 2 1,900,000.00 3.13% 2 605,899.00 1.00% 3 558,834.00 0.92% 3 22,525.00 0.04% 4 164,817.00 0.27% 5 67,878.00 0.11% Total Potential Taxpayers Total Salary Earners Registered Personal 17,691,529 29.15% 60,691,529 100.00% Total Potential Taxpayers Total Salary Earners 5,431,689 30.70% Registered Personal Number of eligible taxpayers after the application of 4 12,423 0.02% 13,640,847 22.48% 60,691,529 100.00% 5,431,689 39.82% Sources: own preliminary simulation
7. Result and Discussions 7.4. Actual Share of PIT Payment vs Compliance Share of Personal Online Tax Payment (2005-2009) Deciles Share of Tax Paid 2005 2006 2007 2008 2009 1 0.13% 0.15% 0.17% 0.03% 0.05% 2 0.13% 0.13% 0.16% 0.09% 0.14% 3 0.21% 0.20% 0.26% 0.18% 0.27% 4 0.32% 0.31% 0.39% 0.31% 0.48% 5 0.49% 0.46% 0.59% 0.55% 0.80% 6 0.75% 0.71% 0.90% 1.00% 1.35% 7 1.20% 1.14% 1.45% 1.90% 2.33% 8 2.27% 2.18% 2.73% 3.72% 4.31% 9 5.85% 5.76% 6.74% 8.48% 8.91% 10 88.67% 88.95% 86.62% 83.73% 81.36% Total 100.00% 100.00% 100.00% 100.00% 100.00% Source : MP3/MPN_ DIT.TIP 201008 Note: Online payment covers most payment through partner bank for onlinepayment Personal tax payers compliance (2005-2009) Personal Tax Payer 2005 2006 2007 2008 2009 Registered Tax payers 2,564,735 2,959,006 3,251,753 5,431,689 8,807,666 growth 15.37% 9.89% 67.04% 62.15% Submitted Tax File Return 851,190 898,036 899,567 1,677,160 4,853,323 growth 5.50% 0.17% 86.44% 189.38% Source: DGT, Ministry of Finance, the Republic of Indonesia, 2010
8. Conclusion The result shows that the new policy: yield significant losses of potential tax base and potential tax revenue favorable effect of tax burden distribution, all income deciles bear a smaller burden under the application of the new law more equal distribution of tax burden is achieved by the reduction of income tax burden in the highest income deciles while still maintaining low burden in the lower income deciles. thus reducing revenue dependency to highest income deciles estimate of gini coefficient before and after pit reform had indicated a decreasing income inequality as a favourable impact from the reform. Our microsimulation estimate verifies that the structure of income and tax will always preserve the concentration of income in the first and second highest deciles. Extensification program by improving compliance is more important at this moment rather than changing the tax structure to increase the tax basis or the tax potentials. Based on revenue and compliance figure in 2009, the Indonesian government has a considerable success in their first step to increase the tax basis and personal tax payers compliance. Future model and base data improvement.