Preaching for Piketty: Taxing the Wealthy in the

Aftermath of Tax Amnesty

Andreas Rossi Dewantara
Diploma IV Akuntansi Alih Program, Politeknik Keuangan Negara STAN, Jakarta Selatan
7-C Alih Program / 04 / 154060006616
email: andreas.dewantara@gmail.com
News Summary: With the draft on National Forgiveness Act already waiting for Parliamentary
approval, the government is targeting the National Forgiveness Act (as the legal umbrella of Tax
Amnesty) should be completed by 2015.
The purposes of this act are twofold. First, to return the money located abroad, estimated at 3.000
trillion rupiah, into the country. Second, if the Tax Amnesty program is effective, then the tax
ratio is predicted to rise from 11 percent to 13 percent or 14 percent, notwithstanding an increase
in foreign exchange reserves and additional capability for a more massive development.
Abstract: Indonesia is one of the countries with steadily growing economy. At the same time, the
number of wealthy people and inequality are also increasing. This situation fits the theory
championed by Thomas Piketty, which explained the rising economic disparity caused by higher
return on capital that is not yet sufficiently taxed. This paper attempted to discuss the schemes
suggested by Piketty, inter alia, wealth tax, inheritance tax, and high-income labor tax to
suppress the economic gap between the rich and the poor. The proposal of National Forgiveness
Act, which also mandated the creation of national database regarding the wealth transferred
from offshore, can serve as a stepping stone to devise Pikettian taxes as long-term policies to
address inequality.
Keyword: tax policy, wealth tax, inequality, Thomas Piketty, tax amnesty
1. INTRODUCTION
1.1.
Background
Indonesia was one of the countries that had experienced the fastest growth in terms of the
number of wealthy people. A Global Wealth Report by Credit Suisse showed that there were
98.000 individuals possessing assets worth more than US$ 1 million in 2014. Another world

wealth report by Capgemini Financial Services Analysis showed that the wealth of Indonesian
HNWI (High Net Worth Individual) grow 15,4% in 2015, reaching a total of US$ 158 billion. It
is also likely that this number will grow in the future, given continual growth of Indonesian
economy. The Global Wealth Report by Credit Suisse estimated that in 2017, Indonesia will have
161.000 millionaires, or a 64% increase from 2014.
While the growth of millionaires seems good at the first glance, it hides an ugly picture beneath.
The growth of Indonesian rich isnt followed by equality. The wealth share of top decile (top
10%) in Indonesia is rising from 70,2% in 2007 to 77,2% in 2014. That means more than half of
the countrys wealth is owned by only 10% of its population. In other words, the rich gets richer,
while the poor remains poor if not getting poorer.
In 2011, National Development Planning Board (Bappenas) reported that one of Millenium
Development Goals, that is to reduce the number of poor people (defined as people who live on
less than a dollar a day) had been achieved. Notwithstanding such commendable achievement,
tackling inequality by means of income redistribution remains an important issue, if not a
pressing one.
The first justification for income redistribution is, of course, a matter of justice. In a just society
it is a perversity to see people dying to make ends meet while the rich continue to accumulate
wealth. See for example an expos on Indonesian superrich in a book titled Para Superkaya
Indonesia: Sebuah Dokumentasi Gaya Hidup (Indonesian Superrich: A Documentation of
Lifestyle) written by Veven Sp. Wardhana and Herry Barus. In the aforementioned book, the
Indonesian conglomerates owned private jets worth US$ 5 million to US$ 50 million. They also
own many luxurious condominiums in Hong Kong and Singapore. (In fact, based on Jones Lang
LaSalle 2006 report, 21% of apartments and condominiums in Singapore is owned by

Indonesians more than by Singaporeans themselves.) This condition depicts a very stark
contrast to the bleak portrait of Indonesian poors, many of them are homeless, and many of them
die in daily basis due to starvation, malnutrition, and inability to access proper health care.
Second justification is that the more equal a society the more beneficial it is for domestic
economy. The rationales are that: a) stronger middle and lower classes protect them from
inflation price shock, thus reducing the needs for government subsidy, b) that stronger middle
and lower class act as a market to absorb and consume domestic productions should international
markets grow sluggish due to economic downturn. This will help the wheel of domestic economy
to keep on turning.
On the other hand, there is approximately 3.000 trillion rupiah of Indonesian wealth currently
located offshore that is untouched by tax. Government of Indonesia thus drafted a controversial
National Forgiveness Act As long as the individual/corporation pay an expiation payment, the
law allows the offshore wealth to be transferred back to Indonesia with additional benefits such
as exemption from tax and all penal law persecutions (with the exception of terrorism, drug
dealing, and human trafficking). The expiation payment is amounted from 3%, 6%, and 8% of
net worth depending on the period where such individual/corporation submit a request of tax
amnesty. Regardless of the controversy (for instance since the law implicitly allows an
exoneration for corruption money), the question remains: after all the wealth transferred back,
what next? Because tax amnesty only answer a short-term problem of revenue deficit, and offers
none beside short-term income redistribution. One practical policy to both lessen inequality and
to generate sustainable income for government is to reintroduce wealth tax after the tax amnesty.
We can learn about wealth tax from Thomas Piketty. Piketty, a French economist, addressed the
issue of tax, wealth, and inequality in his highly influential and controversial book, Capital in

the 21st Century. He comprehensively used taxation data from various countries, dating since
1900s to 2010s. His conclusion is alarming: that economic growth per se will not result in
equality. Because the rate of return in owning capital is higher than economic (productivity)
growth, one can get richer than those who work hard simply by accumulating capitals. The return
on capital is even greater for the superrich who owns a lot of capital. It is indicative from Piketty
research that policy targeting growth (and growth only) will only manifest in inequality and
jobless growth because wealth will only concentrate to the rich. Thats why to reduce inequality,
Piketty advocates a form of wealth tax, in order to tax the capital of the wealthy. By this tax, the
rate of capital may be reduced near growth rate, so that all population gets an equal amount of
growth. And by using the revenue from wealth tax to fund public goods/service or using it as
transfer for poverty reduction, theoretically, inequality can be reduced.
1.2.

Problem Formulation & Methodology

This paper will attempt to discuss:

a. The general economic picture of the Indonesian wealth
b. Proposal of wealth tax: on net worth, inheritance, and high income job
The methodology for this paper is both qualitative and quantitative, using secondary data.
In this paper, the terms wealth and capital may be used interchangeably.
2. THEORETICAL FRAMEWORKS
2.1.
Wealth and capital as taxable income
The draft of National Forgiveness Act defines wealth as an accumulation of economic capacity
in the form of assets both tangible and intagible, both movable or immovable, whether used for
economic activity or not, which is located inside or outside Indonesian jurisdiction. It is then
valued according to fair value/market value in rupiah currency (or converted into rupiah based on
the exchange rate of December 31st, 2014).

Vito Tanzi and Howard H. Zee in Tax Policy for Emerging Market observed that the income tax
consists of two broad components: a labor tax and a capital tax. This framework is also agreed by
Indonesian Income Tax Code no. 36/2008. According to Indonesian Income Tax Code, income is
taxable object. It is defined as any increase in economics capacity received by or accrued by
taxpayer from Indonesia as well as from offshore, which may be utilized for consumption or
increasing the taxpayers wealth, in whatever name and form, including:
a. compensation or remuneration received or accrued in respect of employment or service
rendered, including salary, wage, allowance, honorarium, commission, bonus, gratuity,
pension, or other forms of remuneration, unless otherwise stipulated by this Law;
b. lottery prizes, or gifts in respect of employment or activities, and reward;
c. business profits;
d. gains from the sale or transfer of property, including:
1. gains from a transfer of property to a company, a partneship, and other entity in
exchange for shares or capital contribution;
2. gains accrued by a company, a partnership or other entities from the transfer of
property to its shareholders, partners or members;
3. gains from a liquidation, merger, consolidation, expansion, split-up, acquisition, or
reorganization in whatever name and form
4. gains from transfer of property in the form of grant, aid or donation, unless they
are given to relatives within one degree of direct lineage, and to religious body,
educational or other social entity including foundation,cooperative, or to any
individual who conducting micro and small business which stipulated by Minister

of Finance, provided that aforementioned parties have no business, employement,

ownership nor control relationship; and
5. gains from the sale or the transfer of part or all of mining rights, participation in
financing, or capitalization in a mining company;
e. refund of tax payments which already deducted as an expense and any additional payment
of tax refund;
f. interest including premium, discounts, and compensation for loan repayment guarantees;
g. dividends, in whatever name and form, including dividends from an insurance company to
its policyholders, and distribution of net income by a cooperative;
h. royalty or compensation from the use of right;
i. rents and other income from the use of property;
j. annuities;
k. gains from the discharge of indebtedness up to a certain amount stipulated by
Government Regulation;
l. gains from foreign exchange
m. gains from revaluation of assets;
n. insurance premium;
o. contribution received by or accrued by an association from its members who are
taxpayers engaged in business or independent services;
p. an increase in net wealth from income which has not been taxed;
q. income from sharia business;
r. compensation as stipulated by Laws concerning General Provisions and Tax Procedures;
and

s. surplus of Bank of Indonesia.

Here, the definition of wealth from the National Forgiveness Act draft can be used as the
definition for the future wealth tax law. So is the current definition of wealth in Indonesian
Income Tax Code, that is an increase in net wealth from income which has not been taxed can
also be used as the basis of taxing a net worth (total wealth, net of debt and tax). In addition of
taxing net worth, current legislation also allows the taxing of asset revaluation, dividends, profit,
interest, and rents, which is likewise in accordance with Pikettian framework of rate of returns of
capital.
2.1. Capital accumulation and inequality
Capital accumulation is a process of generaqting wealth in the form of capital, which is
employed for the purpose of exchange, profit, and general self-expansion of (private) property.
It may be argued that the first discussion of capital came from Adam Smith. In his Wealth of
Nation, Smith described the process of accumulating capital as:
An augmentation of fortune is the means by which the greater part of men propose and wish to
better their condition. It is the means the most vulgar and the most obvious; and the most likely
way of augmenting their fortune is to save and accumulate some part of what they acquire,
either regularly and annually, or upon some extraordinary occasions. [] In the midst of all the
exactions of government, this capital has been silently and gradually accumulated by the private
frugality and good conduct of individuals, by their universal, continual, and uninterrupted effort
to better their own condition.
On the contrary of Smith, who described the process of capital accumulation in a peaceful way,
Karl Marx expressed his concern that the accumulation of capital/wealth assume the
subsumption of another human as a subservient party to the capital owner. Marx explained that

as mankind entered the agricultural era, it was split into classes: the land owners and those who
didnt own land the ones who owned the means of production, and those who didnt own.
Those who didnt own land sold their labour to the land owners, and since the land owners paid
their workers with just enough payments to live their daily lives, the profit the excess of
harvest were accumulated for themselves. This was the first form of surplus value. This
continued to occur in the feudalistic era, where the landlords hoarded many properties and
profited from them. Meanwhile the commons did not even own lands for their living space and
subsistence, inasmuch many lands owned by the landlords were actually idle or more than
needed by the landlords. This is called absentee ownership. Absentee ownership created an
excess of lands yet a deficit of common ownership.
In the premodern era, the appropriation of surplus value even manifested in a vulgar and obscene
way, which are slavery and imperialism. Humans were not only milked for their labor, but were
also owned and sold as property. Country invaded another country to absorb their labors and
their resources. Wealth were transferred into the invaders, leaving the invaded country in a poor,
disarray state.
After the Industrial Revolution, the surplus value appropriation by the capital owners came in the
form of wages. Since wages expense are always smaller to the revenue, the net income are
always accumulated by the capital owners as retained earning and dividends. For this very
reason, it is in the interest of capitalists to always push wages down as cheap as possible, so as to
always maximize profit for themselves. There was also emergence of phenomena such as rentier
economy, in which common resources are either monopolied by the state or the capitalists.
Hence, Marx argued that the process of wealth accumulation is not as peaceful as what Smith
described. And since workers have no claims to the means of production and surplus value of

their products, the gap between them and capital owners are widened by the day, creating the
inequality that we have today.
Thomas Piketty also affirmed Marx conclusion, albeit did not concur to his solution (i.e.
communism). Both Piketty and Marx argued that inequality are not an accident of capitalism,
rather, its feature and logical consequence. Piketty further supplanted his idea using data to show
that the rate of return on capital (r), where r includes profits, dividends, interest, rents and other
income from capital is greater that the rate of economic growth (g), which is measured in income
or output. This result in his inequality formula or r > g. The consequences of r > g are that 1)
wealth tends to accumulate more quickly from owning capital than from labor, 2) and tends to
accumulate more among the rich, increasing inequality. Piketty argued for a policy mix of global
wealth tax, inheritance tax, and progressive income tax.
The rich ought to be taxed more, as it is only just to do so. This seemingly discriminatory policy
applied to the rich fits the idea of justice, namely the vertical justice i.e. different treatment for
people with different economic ability. It is also fits the idea of justice as fairness championed by
John Rawls in his book A Theory of Justice. One of the principle of justice, Rawls argued,
permits an inequality as long as it benefits the worst-off. We can conceive the idea that inequality
(in the form of higher tax rates for the rich) is permitted, since it (the tax revenue) is redistributed
into, inter alia, education and poverty alleviation to benefit the economically worst part of the
society.
3. RESULT AND DISCUSSION
3.1.
The General Economic Picture of Indonesian Wealth
As what has been previously mentioned in the background of this paper, the number of
Indonesian rich is growing but so is inequality. To see how wealth is accumulated heavily on top,

we can simply take a look on the richt 50 of Indonesia. The list below is from Forbes Top 50
Indonesian Richest in year 2014:

Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

Name
Budi and Michael Hartono
Susilo Wonowidjojo
Anthoni Salim
Eka Tjipta Widjaja
Sri Prakash Lohia
Chairul Tanjung
Boenjamin Setiawan
Mochtar Riady
Peter Sondakh
Sukanto Tanoto
Tahir
Bachtiar Karim
Putra Sampoerna and Family
Theodore Rachmat
Murdaya Poo
Kusnan and Rusdi Kirana
Eka Tjandranegara
Martua Sitorus
Eddy Katuari and Family
Kuncoro Wibowo and Family
Ciputra and Family
Ciliandra Fangiono and Family
Husodo Angkosubroto and Family
Hary Tanoesoedibjo
Purnomo Prawiro
Edwin Soeryadjaya
Djoko Susanto
Achmad Hamami and Family
Kartini Muljadi and Family
Low Tuck Kwong
Husain Djojonegoro and Family
Benny Subianto
Harjo Sutanto
Alexander Tedja
Soegiarto Adikoesoemo
Aksa Mahmud
Garibaldi Thohir
Sjamsul Nursalim
Hashim Djojohadikusumo
Eddy Kusnadi Sariaatmadja
Abdul Rasyid
Lim Hariyanto Wijaya Sarwono
Arifin Panigoro
Irwan Hidayat
Sudhamek
The Ning King
Jogi Hendra Atmadja
Prajogo Pangestu
Handojo Santosa
Trihatma Haliman
Total

Net Worth
In million USD
In trilion Rupiah
16.500
202,95
8.000
98,4
5.900
72,57
5.800
71,34
4.400
54,12
4.300
52,89
3.500
43,05
2.300
28,29
2.200
27,06
2.110
25,953
2.100
25,83
2.000
24,6
1.900
23,37
1.900
23,37
1.700
20,91
1.700
20,91
1.700
20,91
1.700
20,91
1.700
20,91
1.600
19,68
1.500
18,45
1.500
18,45
1.500
18,45
1.400
17,22
1.300
15,99
1.300
15,99
1.300
15,99
1.200
14,76
1.100
13,53
1.100
13,53
1.000
12,3
1.000
12,3
950
11,685
935
11,5005
930
11,439
860
10,578
855
10,5165
830
10,209
825
10,1475
820
10,086
805
9,9015
800
9,84
680
8,364
660
8,118
655
8,0565
650
7,995
630
7,749
570
7,011
555
6,8265
500
6,15
101.720
1.251,156

Source: Forbes
We can see how even the top 50 be able to accumulate wealth that is more than 10% of
Indonesias GDP. This top 50 peoples total wealth are even larger than Indonesias 2014 tax
revenue which only came at 1.110,2 trilion rupiah.
In terms of Gini ratio, which measure the inequality (0 being perfectly equal, 1 being perfectly
inequal), the portrait of Indonesian society is as follows:

Gini Ratio
0.5
0.4
0.3
0.2
0.1
0

Source: Badan Pusat Statistik

Counterintuitively, Indonesian society were more equal in times of crises (1998 and 2008).
Presumably because the rich suffered major loss from their investments. However, since 2009
the inequality of Indonesia is steadily rising, even reaching the worst level since 1996.
The same portrayal of inequality is also given by Piketty in Capital in the 21st Century. Piketty
even went further back in time, showing that since 1980s Indonesian riches accumulate greater
and greater share of total income.

Source: Piketty (2014)

Another study from Leigh and van der Eng (2008) also posited the same result. Using estimates
from taxation and survey data, the study suggested that top income shares in Indonesia have been
relatively high (and steadily increasing) over the course of the twentieth century.

Source: Leigh & van der Eng (2008)

What does it mean? It means that growth does not equal to equity. It means that true to Pikettys
conclusion, as capitalism is maturing wealth will tend to concentrate to the rich. This also means
that the trickle down effecr of economic growth will not happen as most of the purchasing power
goes not to the bottom but to the top. It is what happens in Indonesia.

How does this happen? First, lets take a look on the concept of Income and Wealth. Saez (2014)
characterized income as a flow of Labor income + Capital income. Capital income is the return
on Wealth, which is a stock accumulated from savings and inheritances. In aggregate, labor
income is about 70-75% of total income (while Capital income is about 25-30% of total income).
However, total wealth is about 400% of total annual income. And as annual rate of return on
wealth (6-7%) is higher than the economic growth (4-5%), wealth inequality is always much
higher than income inequality. In fact, bottom 50% families own about zero wealth).
3.2.

Proposal of Wealth Tax

3.2.1.General Model
Per Piketty, wealth follow Pareto distribution model in which:
Pr[Income > y] = y/
In which wealth is is increasing with , the rate at which incomes grow with age, and decreasing
in the death rate . This gives inequality measure in the inverse log of the distribution:
income = /
Next, n a given period of time (a year) the capital k(t) produces income y (t) through
the following linear production function:
yt = A kt
assuming ceteris paribus labor input, in which A is the technology (constant) parameter and
measures the total factor productivity (TFP) in the range of 0 < A < 1. y t can be
saved/accumulated as wealth or consumed (ct). Government thet levies income tax proportional
to income at rate 0 < < 1 which reduces this capital accumulation. Assuming honest
compliance, the rate which the capital accumulation grows is denoted by r, where:
r = dkt = ((1 ) yt - ct) dt

However, a person may use a fraction of his wealth to be consumed at any time. Consider a
constant fraction which denotes this consumption. Suppose we then create a wealth a wealth
tax , which 0 < < 1. With this setup, the individuals wealth grows exponentially at a constant
rate r . Next, assume that average wealth per person (or capital per person) grows by
exogenous factor at rate g, which is a macroeconomic model of growth. The individual capital
accumulation is then r g > 0. With the absence of wealth tax, wealth will cumulatively
lead to wider inequality as time progresses if r g is big enough, even when we have accounted
(death) as factor. The general model of wealth tax is then formulated so as to minimalize r g,
thus r g .
3.2.2.Taxing Net Worth
Since the establishment of common ownership as per Marx is difficult, if not downright
impossible, it is more practical for government to utilize tax to create a more eqalitarian society.
Indonesia once had specific law regarding wealth tax called Ordonnantie op de Vermogens
Belasting 1932, Staatsblad Year 1932 No. 405, or commonly known as Ordinance of Wealth Tax
1932. The ordinance was made based on the principle that the owner of the assets that capable of
generating income, has a greater power than another person who obtained the same income from
other sources i.e. labor. Therefore the surplus of power must be taxed by the so-called wealth tax.
According to Ordinance of Wealth Tax 1932, the base for the tax is not on the income, but on the
net worth. And since the net worth of wealth is used to measure surplus power, in order to levy
tax on wealth, the law stipulated that the wealth tax rate must be very soft to supplement the
already progressive income tax. Similarly, in accordance with the income tax, the wealth tax
must be paid in the current year.

Based on Keputusan Menteri Keuangan (Financial Minister Decree) no. 1238/KMK.04/1984

which was the last adjustment regarding Ordinance of Wealth Tax 1932, the lowest limit of net
worth is 80 million rupiah. This means that in 1984, a person owning a house worth 60 million
rupiah, a car worth 15 million rupiah. and radio, television, refrigerator and so valuable all of 5
million rupiah so the total net worth is 80 million rupiah was exempt from wealth tax.
However if the persons asset worth more than that, it is subjected to tax amounted 5 rupiah for
every amount of 1.000 rupiah round (0,50%) after deducting said assets to the limit of
nontaxable wealth amounted to 80 million rupiah. So, a persons whose net worth was amounted
to 100 million rupiah must pay a wealth tax of 0,50% x (100 80 million) = 100.000 rupiah
Jewelery and precious metal were taxed separately. They were exempt from wealth tax as along
as their total worth was 12 million rupiah or less. The comparable tax on net worth (defined as
total asset net of debt) is currently used in France in its solidarity tax on wealth. The tax, called
Impt de solidarit sur la fortune (ISF) uses a progessive tax rate.
Share of net wealth
Tax rate
0 800.000
0%
800.000 1.300.000
0,50 %
1.300.000 2.570.000
0,70 %
2.570.000 5.000.000
1%
5.000.000 10.000.000
1,25 %
More than 10.000.000
1,50%
Norway, Spain, Italy, and Switzerland also have their versions of wealth tax. Norway levies up to
0,85% rate from net worth exceeding 1.200.000 krone. Spain levies a patrimonio tax from 0,2% 3,75% of net worth exceeding EUR 700.000, after the deduction of EUR 300.000. Italy levies
two forms of wealth tax, IVIE for real assets held outside Italy (rate 0,76%) and IVAFE for
financial assets held outside Italy (rate 0,15%) Switzerland levies at cantonal level at variable,
mostly low levels (0,13% - 0,94%). Piketty himself argues for a 10% global wealth tax of capital.

Nevertheless, Indonesian wealth tax disappeared along the first tax reform in 1983-1985. It is
replaced by what is known nowadays by PPh (Pajak Penghasilan/income tax). Albeit there is no
longer a specific tax on net worth, any returns generated from capitals are taxable, for instance
rent, dividend, royalty, and interest. Indonesian income tax also recognize any gains from trade
of assets, such as property, foreign exchange, or stocks (but only stocks traded in Indonesian
Stock Exchange.)
But the above-mentioned taxes acknowledge return on capital only when the capital is traded or
generating revenue streams, which is not always the case. Capital may increase in value (and
thus generate wealth) even if it is just sitting there. (One of the biggest return from dormant
capital comes from real estate, whose value may double in less than 5 years, especially in big
cities like Jakarta, Bandung, Jogjakarta, and Surabaya.) This is why one of the accounting
principle required by IFRS (International Financial Reporting Standard), which is adopted in
Indonesia, necessitates regular asset revaluation. The purpose is to better reflect the accurate and
relevant value of such asset closer to its market value. For example, a land in Kalibata purchased
in 1994 for 150 million rupiah may as well worth 10 billion rupiah nowadays. According to
IFRS, gains from asset revaluation is recognized as other comprehensive income. This gain is
taxable under the current tax code. Nonetheless, asset revaluation requires valuers, which are not
sufficient to cover the revaluation for the whole country and for annual basis, rendering asset
revaluations only done scarcesly by few people/corporations only. Another method is to use
market price, which is employed in calculating land and building tax (Pajak Bumi dan
Bangunan/PBB). But since there are no integration between asset list on SPT PPh (income tax
form) database and PBB database, it is difficult for government to effectively and efficiently
collect taxes on asset revaluations. This is the first limitation of current tax code.

The second limitation is that the current tax code has yet to cover gains from holding stocks and
also that income from stocks are only recognized when it is traded on Indonesian Stock
Exchange or when it is inherited/granted. It is add odds with the principle of asset revaluation
which only applies to property, plant, and equipment (PPE), even though stocks, like PPE, may
change in value and capable of generating wealth in every year. There have been talks dating as
recent as 2013 to levy tax on stock ownership. The Director General of Tax at that time, Fuad
Rahmany, expressed his proposal to levy 0,1% annual tax on founders share. Unfortunately,
there are no further continuations on his proposal.
The third limitation is that taxing net worth needs to take into account the current income and
expenses of the tax payer. For example, a pensioner owns a house. Suppose the houses price was
5 million rupiah in 1980 and its market price today is 500 million rupiah. The pensioner has no
other income beside its annual pension. It is therefore very burdenful for him to pay the wealth
tax. To mitigate the risk of excess burden government must put an exemption mechanism. A
taxpayer who seeks to be exempted from wealth tax must submit their income tax report to show
that his current net income is not significant enough to cover all of his expenses, debt payment,
saving, and wealth tax. Again, this requires a robust database containing assets values, payment
of taxes on assets, and also income tax payments.
Additionally, a proposal of wealth tax must accommodate the current tax on asset such as the
aforestated PBB and also PKB (Pajak atas Kendaraan Bermotor/Motor Vehicle Tax) so as not to
create a double taxation. It can be formulated that PBB and PKB be able to function as tax credit
for the wealth tax, or that building and motor vehicle be altogether excluded from the
computation of wealth tax. Furthermore it can be argued that taxing net worth can constitute a
double taxation, since the previous net worth has been taxed. It also do not recognize the

decrease of net worth as a loss. Thus, it can be formulated that full net worth is taxed on the
current year, and on the subsequent years it is only the gains on net worth that is taxed.
3.3.3.Taxing Inheritance
Under the principle of Rawlsian justice, inheritance must be taxed so as to compensate people
those who are disadvantaged from this brute luck of being born in poor family who cannot afford
good education and nutrition. We consequently tax the rich to share the burden of providing
adequate basic social schemes for the worst off and reduce inequality, so that we can imagine
that even though we end up born in poor family, social arrangement permits and guarantees us to
basic social schemes like security, education, and healthcare.
In Indonesia, inheritance is taxed using the similar progressive tax rate that is applied on personal
income tax. Inheritance, before it is bequeathed, is considered as tax subject instead of tax object.
The rationale for this is to prevent the benefactor to split her assets unto the lower-bracket rate,
thus reducing its tax. A not-yet-bequeathed inheritance also defined as a tax subject in order to
apply only a single PTKP (allowance for nontaxable income) instead of applying PTKP for each
heirs. For instance, an inheritance worth 150 million rupiah is subjected to 5% and 15% rate,
amounting to Rp10.300.000,00 in tax. Splitting it for 3 (suppose there are 3 heirs, and the heirs
have no spouses and kids and other income) will only amount to Rp210.000,00 in tax.
Piketty proposes a radical 50%-60% rate of inheritance tax, and even higher for top bequests.
The optimality of such proposal is not discussed in this paper. Yet, pace Piketty, this author
prefers the status quo Indonesian inheritance tax with an adjustment for high-value inheritance.
Two reasons, the first is so as not to put excess tax burden on the middle class. Second, the
current progressive scheme still allows for adjustment (and additional rate) only for the top tier
bequests, which is in accordance to the principle of taxing the rich to reduce inequality.

3.3.4. Taxing High-Income Labor

Hard work, effort, and discipline are good virtues and remains so. Such good virtues should be
appreciated by giving higher wages to those who work harder so as not to discourage
productivity and creativity. Nevertheless, it is because of luck that we live in a world with a
market system that happens to reward our jobs very well often, disproportionately well. It is
only because of luck that we were born in a time and place where the hard work we're good at
(say, stock speculation or legal knowledge) are valued over the hard work that other people are
good at (say, carpenting or repairing air conditioner.) The important variable for richness, it
seems, is not to be our dilligence or hard work, but profession. If we work in a high-value
profession, hard work can yield a huge amount of salaries. If were not, it may not even bring us
ample amount of income to live, however hard we are working everyday.
But we can't have a society where everyone is a banker or a stock trader. We also cannot have
have a society where we have to pay 100 million rupiah to every good and hardworking military
personnel, policeman, nurse, firefighter, schoolteacher, carpenter, electrician and all of the other
professions that civilization needs to survive (and that rich people need in order to stay rich.)
These military personnel, policeman, nurse, firefighter, schoolteacher, carpenter, electrician may
work 100 times harder every day than a businessman some of them even risk their lives on a
daily basis. Yet, they will never make as much money as a businessman make. Take for example
the workers in a tissue factory, whose jobs bear the risk of losing their fingers. Regardless of how
risky their job or how hard they are working, they will never get a wage equaling that of a CEO,
despite both CEO and workers are equally important for the company. This holds true for almost
every industry, whose CEOs salariy exceeds 400-500 times higher than those of the worker.

Thus, to accommodate the inequality of income, it is only appropriate that government

promulgates a progressive rate of income tax.
Indonesia uses progressive income tax rate ranging from 5% for taxable income up to 50 million
rupiah a year until 30% for taxable income more than 500 million rupiah a year for resident
taxpayers. The complete rate is as follows:

Taxable Income Tax Bracket

Tax rate

Up to 50 million rupiah

5%

Over 50 million rupiah 250 million rupiah

15 %

Over 250 million rupiah 500 million rupiah

25 %

More than 500 million rupiah

30 %

Non taxable income allowance (PTKP) as for 2015 are ranging from 36 million rupiah to 48
million rupiah depending on marital status and number of kids (at the maximum of 3).
Nonetheless, the progressive income tax does not apply to non-resident taxpayers. According to
Article 26 of Indonesian income tax code, representatives of a nonresident company and a nonresident taxpayer (other than a permanent establishment) in Indonesia, shall be subject to
withholding tax of 20% of the gross income. These differences in tax rate basically create a net
tax benefit for non-resident taxpayers. The benefit will befall to a non-resident taxpayer whose
gross income Y is:

( y i y i1 ) + PTKP+ k
n

1=1

r i ( y i y i1 )r n
n

i=1

Y >
Where ri is per bracket tax rate for Indonesian taxpayer (i.e. r1 is 5%, r2 is 15%, and so forth); rn
is the top tax rate (30%); rf is the tax rate for non-resident taxpayer (20%); k is deductible official
expenditure or pension expenditure; and yi is the upper income for the corresponding tax bracket
(i.e. y0 is 0, y1 is 50 million rupiah, y2 is 250 million rupiah, and so forth).
It can then be construed that a non-resident whose income in a year is more than 676 million
rupiah in a year (assuming he is not married and having no kids; official expenditure is capped at
6 million rupiah) or more than 712 million rupiah in a year (assuming he is married with 3 kids)
will get a benefit from the differences of tax rate. In other words, an Indonesian manager whose
salary is 1 billion rupiah per year actually pays more income tax compared to a non-Indonesian
manager with the same pay rate. In accordance to the principle of horizontal justice, also per
Pikettys notion of progressive tax, the income tax rate for non-resident taxpayers must also be
made as progressive as those of resident taxpayers.
In addition to that, Piketty also advancing for additional tax rate for the top income bracket.
Given that Indonesian income tax rate hasnt been adjusted since 2007, and given that it can be
assumed that there are growing number of Indonesians who earn more than a billion rupiah a
year (it can be conjectured via indirect correlation that today there are many apartments/houses
whose prices are ranging in billions of rupiah), a new legislation can put an additional tax rate for
income that is more than a billion rupiah a year. However, pace Piketty, this author do not

recommend raising top income tax to 80%. An example of a modest adjustment on top tax rate
can be made as follows:
Taxable Income Tax Bracket
Up to 50 million rupiah
Over 50 million rupiah 250 million rupiah
Over 250 million rupiah 500 million rupiah
500 million rupiah 1 billion rupiah
More than 1 billion rupiah

Using simplified model of Gini coefficient G =

100+
(

Tax rate
5%
15%
25%
30%
35%

1002 ( y 1+. . .+ y n+1 )

n
) and by dividing
100

the population into 5 quintiles, this author modeled a simulation should the top 20% be taxed
using the new scheme where income exceeding 1 billion rupiah is levied with 35% tax rate. The
result is quite promising, with the reduction of Gini coefficient from the current level of 0,413 to
0,407-0,408.
4.

CONCLUSION AND RECOMMENDATION

The government of Indonesia targets double-digit growth in order to create an upper middleincome country by 2025. True to that aim, the growth trajectory of Indonesia experienced
positive trend in the last five years. Yet, such growth is preoccupied by two problems: jobless
growth and inequality. The most viable tool to redistribute income is tax, since one cannot rely
on the benevolence of the rich to willingly donate their money to charity. Charity is harder to
monitor. Charity may also favor certain populations based on the preference of the donors, if not
its scope of distribution is more limited than that of a government. These reasons make charity as
not an ideal tool to redistribute income compared to tax.
If we also consider Thomas Pikettys theory, those two problems stated above are essentially
different faces of the same coin, that is, the consequences of wealth concentration on the top. The

rich prefer to appropriate profits for themselves instead of creating jobs, ever so much as to
replace people with machine or pushing the workers wage down, causing the aforesaid jobless
growth. At the same time, the current taxation scheme has yet to effectively redistribute income
from the rich to the poor. This also hinders the government to collect tax revenues in order to
fund job creations. The result is the increasingly inequal Indonesian society that we have now.
While the brave proposal of Indonesian government to pull offshore wealth back to the country
using National Forgiveness Act is praiseworthy, it has little to address the problem of inequality
in the long run. In the absence of wealth tax or any similar tax designated to tax the rich, wealth
will eventually concentrate to the top yet again. Other countries have realized this, some of them
even have already levied taxes for rich people. The appearance of Thomas Pikettys book
Capital in the 21st Century has also further sparked the discussion on capitalism and inequality in
the international scope. Yet, the discourse on wealth tax here in Indonesia is minimal, if not
completely nonexistent.
Should the National Forgiveness Act be approved by House of Representatives, and should
offshore wealth be transferred back to Indonesia, it is only proper if Indonesian government
enact a tax policy that targets this wealthy people. As what has been discussed in this paper,
Indonesian government can reintroduce wealth tax, together with a policy mix of improvement
on inheritance and high-labor tax rates. Such policies must also take into account the possibility
of double taxation, which can be prevented by mechanism of tax credit or the exclusion of
currently taxable assets from the calculation of wealth tax. The taxes must also be formulated to
exempt people with several specific criteria so as not to placed excess burden to them.
Some organizational issues must also be addressed. First is to build a large swath of reliable
taxation data on a national scale. This taxation data must cover all information of taxpayers

income and assets. With respects to assets in particular, it would be better if government can
integrate data from local governments regarding land and building tax and motor vehicle tax,
National Land Agency (Badan Pertanahan Nasional/BPN) regarding land and building
ownership, Ministry of Law and Huma Rights regarding ownership of limited liability
companies, and data from the repatriated wealth per the proposal of data management mandated
in the National Forgiveness Act draft. It would also be desirable if government finally has access
to bank accounts and transaction data. Only with these data can government able to efficiently
and effectively tax the rich, not to mention minimizing the chance of tax evasion.
Second, is to improve Directorate General of Tax in terms of human resources and information
technology. DGTs current employees are not enough to collect, monitor, and assess the
compliance of Indonesian taxpayers. Moreover, having more employees will help DGT to both
extend and intensify DGTs taxation coverage. Current DGTs IT infrastructure must also be
developed to accommodate the needs for bigger database and to better support its employees in
doing their jobs. Third, is to direct the tax revenues for social safety nets (such as education and
healthcare), public goods, and job creations. Only by such usage that inequality can be
minimized.
Taxing the rich is by no means punishing those who are working hard and being rich. Taxing the
rich means that something needs to be done and those who are rich have the capabilty to do so. It
is not unlike asking a tall person to pick a book in the top shelf: this isn't a punishment for her
being tall, but since no other person is tall enough to get it, then she has to get the book. Those
who are rich are able to share larger portions of their income without having to suffer. Thus,
those wealthy people who refuse to pay higher tax are not only egoistic but also immoral. The
rich must be encouraged to help their more unfortunate fellow human beings. And the Tax

Amnesty, should it happen, can serve as a momentum to start doing so. Hopefully, inequality will
vanish from Indonesia. Hopefully, we can all be prosper together. Because, as Pope Francis once
had said: inequality is the root of social evil.
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