10.1. Role of Tax in The Government and Economy The Government has the right to collect taxes Role and Function of Tax  Source of fund finance government activities and development  Instrument to manage national economy  fiscal policy, tariff policy, etc  Instrument to maintain economic fairness

12.2. Types of Taxation Taxes on earnings  payroll tax Taxes on individual income  capital gain tax Taxes on corporate income Taxes on wealth  property tax, estate (inheritance tax) Taxes on consumption  sale tax, excise tax

12.3. Desirable Characteristics of Any Tax System Economic efficiency Administrative simplicity Flexibility Political responsibility Fairness

12.4. Economic Efficiency Tax system  should not distort, but promote economic efficiency Behavioral effect of tax  all taxes affect behavior (reduce spending)  tax affects on such as work behavior, savings, and investment Corrective tax  e.g. pollution tax (raises government revenues, and improve economic efficiency)

12.5. Administrative Simplicity Tax system  ought to be easy, and relatively inexpensive Factors affecting administrative cost of tax system  required recording system  complexity of the system

12.6. Flexibility Tax system  should allow easy adaptation to changed circumstances Changes in economic conditions  change in tax rates Speed of adjustments  automatic, or slow Political constraints of adjusting rates

14.7. Political responsibility Taxes system  held accountable to the public  transparent

12.8. Fairness The tax system should be fair  treating those in similar circumstances similarly (horizontal equity)  imposing higher tax on those who can better bear the burden of taxation (vertical equity)

12.9. Practice of Taxation in Indonesia

 Introductory Notes Tax as source of fund for national development Increasing tax revenue to reduce dependence on overseas loan for funding national development Tax revenues increases overtime, yet, still not sufficient Tax evasion is common place

 Types of Tax Income Tax (PPh) Value added tax (PPn) Luxurious good tax (PPnBM) Land and building tax (PBB) Excise Import duties Export tax Other kind taxes, such as pollution tax, retribution

 Constraints to Increase Tax Revenues Low average income per capita Unemployment and poverty Bad public awareness for paying tax Corruption Economic inequality Tax administration system  expensive and lack in public accountability

12.8. References (1) Gruber, Jonathan Public Finance and Public Policy. New York: Worth Publishers. Chapter 18 Stiglitz, Joseph E Economics of the Public Sector. New York, USA: W.W. Northon and Company. Chapter 17. Reksohadiprodjo, Sukanto Ekonomi Publik. Yogyakarta: BPFE. Bab 8-12

12.8. References (2) Badan Pendidikan dan Pelatihan Keuangan, Departemen Keuangan Rep. Indonesia Dasar- Dasar Keuangan Publik. Jakarta: Badan Pendidikan dan Pelatihan Keuangan, Departemen Keuangan Rep. Indonesia. Bab