Invest in people, tech to increase tax revenue

If a country has one tax officer for every 680 taxpayers, then, statistically speaking, that country is in the big league: its tax ratio is more than 20%. The trend is clear: the more tax officers there are, the higher the revenue collection.

INDONESIA’S tax system has been underperforming for many years as it does not collect as much as it should.

Since the turn of the new millennium, not once have we been able to achieve a 15% tax ratio, which is considered the minimum level of tax collection to maintain sustainable economic growth.

In fact, Indonesia consistently ranks near the bottom in regional and global comparisons of the so-called tax ratio, or tax revenues as a percentage of gross domestic product (GDP).

Like many problems in life, the tax question is complex and multifaceted, but there are hints to the solutions and some of the probable answers are so simple that they are sometimes overlooked.

Why is our tax system languishing? Because we, as a society, fail to invest sufficient resources into improving it.

First, the number of staff working in the tax administration is too little. And secondly, the operating budget is too low.

If you look at the Organisation of Economic Co-operation and Development (OECD) Tax Administration 2023 report, and do a simple analysis, you will quickly see a relationship between the number of staff working in a tax administration and the amount of revenue that it collects. The higher the number of staff, the higher the revenue.

In countries with a tax ratio lower than 14%, one tax officer is employed for every 2,000 taxpayers.

In countries with a tax ratio between 15% and 20%, there is one taxman for every 1,500 taxpayers.

And if a country has one tax officer for every 680 taxpayers, then, statistically speaking, that country is in the big league: its tax ratio is more than 20%. The trend is clear: the more tax officers there are, the higher the revenue collection.

Okay, so how many taxpayers for every tax officer do we have in Indonesia? The answer is 3,037.

This partly explains why our tax-to-gdp ratio is so low at around 10%. If we compare our situation with that of Australia, a country with a tax ratio of 21%, a rather sobering view emerges.

For a country with a labour force of “only” 13.8 million, Australia employs around 18,000 tax officers.

Indonesia, a country 10 times the size of Australia in terms of the labour force, employs “only” 45,000 tax officers or just 2.5 times Australia’s figure.

If we are serious about increasing our tax collection, then this analysis tells us that we need to significantly increase the number of tax officers.

One may argue that we do not really need that many tax officers. But our own experience tells us otherwise.

As the 2021 study by Basri, Felix, Hanna, and Olken shows, when Indonesian firms were moved from local tax offices into medium tax offices, “with high staff-to-taxpayer ratios, tax revenue more than doubled”.

The type of tax office in and of itself does not guarantee more revenue, but a higher number of staff available to serve and supervise taxpayers can.

So, hire more and hire high-quality staff, not just those with degrees in tax, accounting, auditing and related areas, but also experts in data science, math and computer science to deal with high-volume data and to leverage high-capacity computing including artificial intelligence, as well as other specialists like those with background in economics, human resources management, project management, change management and media and communications.

The number of employees working in the tax administration is but a representation of the bigger picture: the amount of money spent on the tax administration system itself. In other words, the budget allocated to the tax agency.

Here, again, the data is quite clear: the more money spent on the tax administration, the higher the level of tax revenue. For countries in the big league, or those with tax ratios more than 20%, they spent, on average, the equivalent of 0.2% of their GDP for their tax agencies’ operating expenditures.

We allocate only the equivalent of 0.04% of our GDP to our tax administration. Returning to Australia as a benchmark, their level of funding is 0.19% of GDP, almost five times as high as ours.

It is no wonder, then, that Australia’s tax-to-gdp ratio is 21% while ours is only about 10%.

This simple analysis is basically a back-of-the-envelope calculation. More refined analysis can be done, but this much is clear: we are underfunding, underequipping and understaffing our tax administration. And this must change.

If this country wants to improve its tax collection to reach a more sustainable level – to a level where we can provide for health and education for all Indonesians, social assistance for those that need our help, climate mitigation efforts, transition to green energies, better public service, law enforcement and welfare for our public servants, more effective corruption eradication and many other priorities – then we need to invest in our tax administration.

Invest in people, invest in technology. Invest big, invest smart and God willing, we can expect big results. Our tax system is underperforming because it is under-resourced.

The sooner we admit this and act to remedy the situation, the better for all of us. If the remedy consists in establishing a new agency that has its own budget and authority to hire and fire staff, then so be it.

If it is not wise to do so, then please increase the funding for the existing agency and give it more manpower.

Either way, act now. We cannot afford to wait, winter is coming.