CROSS-COUNTRY RESEARCH ON TAX POLICY AND INEQUALITY:

CROSS-COUNTRY RESEARCH ON TAX POLICY AND INEQUALITY:COMPARATIVE STUDY OF INDONESIA, SOUTH AFRICA AND BRAZIL

By :
YUSTINUS PRASTOWO
SUGENG BAHAGIJO
SITI KHOIRUN NIKMAH

Indonesia, South Africa and Brazil are developing countries with strong economic
performances in comparison with their peers, although this is accompanied by severe
inequalities. Inequality can create a number of problems, including unsustainable economic
growth. Taxation is an effective policy instrument that can be used by governments to tackle
the ever widening gap between rich and poor: taxes can be both a source of sustainable
funds for public spending and a tool for income redistribution. At the same time, the quantity
of tax revenue (the amount raised) and its quality (progressiveness, optimization of tax
expenditures) can provide benchmarks for assessing a country’s tax system in terms of
economic inequalities.

Available data show that the revenue performance of all three countries lags far behind that
of developed countries, and the way in which revenue is collected is far from equitable. In
Brazil, the tax revenue system is dominated by regressive indirect taxes. In South Africa
and Indonesia, tax revenues consist mostly of more progressive direct taxes but there is
a significant difference between income tax revenue collected from paid employees and
from self-employed individuals, reflecting low levels of voluntary tax compliance and a large
dependence on pay-as-you-earn (PAYE) systems or other withholding mechanisms.


The structure of the taxation systems in all three countries leads to inequitable outcomes.
Brazil has a complex system of indirect taxation based on earmarking. In terms of personal
income tax, all three countries impose relatively low maximum tariffs compared with
developed nations. In Indonesia and South Africa, the maximum income tax rate is applicable
only to impossibly high levels of income. Furthermore, tax policies in these countries do not
generally reflect principles of gender justice.

One of the reasons for low levels of tax revenue compared with what could potentially be
raised is widespread tax evasion and tax avoidance, which take place in all three countries.
This is made possible by international tax schemes and tax havens, of which High Net Worth
Individuals and multinational corporations are able to take advantage. In studies looking
at assets held in tax havens, the flow of illegal funds and losses incurred due to transfer
pricing, all three countries have consistently ranked in the top ten. Many self-employed and
workers in the informal sector also evade taxes, as indicated by the existence of substantial
economic capacity (in terms of gross domestic product) yet insignificant tax contributions.

To effectively overcome disparities, a system of taxation that is sound, both quantitatively
and qualitatively, must be in place. Tax potential should continually be maximized by
strengthening law enforcement and increasing levels of tax compliance. Brazil needs to
increase its proportion of direct taxes, while Indonesia and South Africa should work towards
increasing income tax revenue from the self-employed. Tax policies (specifically regarding
personal income tax) must also be able to support a progressive tax structure by setting
marginal tax rates as high as possible, with the top rates applied to the lowest possible
levels of income. Tax expenditures should also be optimized through tax allowances and tax
exemptions targeted towards vulnerable women and children, low-income workers and other
marginalized groups.

To combat international tax evasion, multilateral partnerships are necessary, engaging as
many countries as possible. One way to do this is by initiating action on the digital economy,
transfer pricing and the exchange of information under the OECD’s Base Erosion and Profit
Shifting (BEPS) Action Plan. Beyond the BEPS Action Plan, developing countries must take
initiatives themselves, including participating in discussions and the formulation of future
action plans on BEPS; moving towards greater regional cooperation; reviewing unfavourable
clauses and implementation of tax treaties; proposing the adoption of unitary taxation and
formulary apportionment regimes by means of country-by-country reporting, as an alternative
to the current ‘arm’s length’ approach, and a comparability test for transfer pricing; and
urging Northern countries to assist in information exchange in order to reduce profit shifting
between tax jurisdictions.


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