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Indonesia Ranks 6th for the economic inequality

Friday, 24 February 2017 | Adinda Ade Mustami

JAKARTA. Indonesia ranks sixth in the world in terms of the worst income gap between the rich and the poor. A report titled “Towards a More Equal Indonesia”, which was prepared by the Oxfam Indonesia and the International Forum on Indonesia Development (INFID), the stable economic growth had not yet been able to reduce the gap.

The extreme poverty rate of Indonesia has decreased to 8%. However, Oxfam and INFID estimated, this achievement has not yet been accompanied with the income equality.

Even, during the last two decades, Indonesia has experienced the fastest increase in the gini coefficient among the South East Asia countries. The report also revealed that the wealth of four richest people in Indonesia is equal to the accumulation of the wealth of 100 million poorest people in this country. “Aside of hampering the poverty eradication, the gap has delayed the economic growth,” said Director of INFID Sugeng Bahagijo, Wednesday (23/2).

According to Bahagijo, the gap was driven by five aspects. First, the market fundamentalism, which had been introduced to Indonesia during the 1997 financial crisis, has been enabling the rich people to reap the biggest portion of income. This has increased the political capture of the rich people. In this case, the rich people can use their influence to change some regulations to be more profitable for them.

Second, the gender inequality. Third, the low wages, which caused the low class people cannot improve their standard of living. Fourth, the gap between the urban and the rural areas in terms of access to infrastructure. Fifth, the taxation system, which failed to distribute the wealth. “Indonesia is facing the multi-dimensional gaps,” said the Director of Advocacy and Campaign of Oxfam International Steve Price Thomas.

High tax for the rich people
In order to cope with the issues with the gaps, Oxfam and INFID suggest the government to increase the tax rate for the super rich people to 45%. The super rich people include those who have income of more than Rp 10 billion per year.

This group includes the executives, top managers, as well as the owners and the share holders of the biggest companies in Indonesia. “There are 200,000 people with the income of more than Rp 10 billion in Indonesia,” said the Spokesperson of Oxfam Dini Widiastuti.

According to Dini, some G20 countries,such as the Great Britain, have imposed the income tax tariff at the level of 45%, while the developed countries such as Belgium and Denmark have imposed the income tariffs of 50% and 51%, respectively.

In the long term, the private income tax has also to be adjusted by imposing the additional tax for the rich people. For the example, the government may impose the tax tariffs of 45% and 65% to those with the annual income of Rp500 million-Rp 5 billion and more than Rp 10 billion, respectively.

Oxfam and Infid also suggest the government to impose a high tax tariff on the assets of wealth and the inheritances. Some developed countries, such as Japan and South Korea have imposed the tax tariffs of the assets of wealth and the inheritances as much as 55% and 60%, respectively.

Both institutions also suggested the government to cancel the plan to cut the tariffs of corporate income tax. The government is also suggested to review the tax incentive policy. Those policies are not necessarily effective to enhance the tax compliance.

The Minister of Finance Sri Mulyani admitted that Indonesia has a high gini coefficient. However, the Minister said that the gini coefficient, which is measured with the consumption rate has not yet reflect the real gap. In this case, if the gini ratio is measured with the public income, the gap in Indonesia will be very high.

When the commodities price hiked during 2011-2012, every 1% economic growth contributed to the 0.1% of the reduction in the gini coefficient in Indonesia. However, during 2013-2015, every 1% economic growth only contributed to 0.033% of reduction in the gini coefficient.

Sri also considers taxation as an instrument to reduce the gap. However, the tax adjustment is not limited to the issue related to the higher tax tariffs for the people with higher income.

“The most important thing is the ability to collect (the taxes),” she said.

The automatic exchange of information (AeoI) is expected to be effective to reduce the gap. The government also may want to enlarge the budget transfers to the local governments. (Muhammad Farid/Translator)


 

Reporter: Adinda Ade Mustami
Editor: Sanny Cicilia