I sense that the natural response to the question stated on the title of this writing is “of course” or “duh”. But let us look a little more open-mindedly on reality. As a matter of fact, it is not always bad for the economy.
Tax evasion is the effort to escape from the duty to pay taxes, normally by misstating financial statements and/or bribing government tax collectors (the IRS, or Ditjen Pajak). It was reported that in the year 2010, the RI government suffered a total loss of Rp 5.8 trillion (around US$ 60 billion) due to tax evasion. One thing is certain, tax evasion is always bad for the government. But what about the economy as a whole?
The most used measure of the welfare of an economy is the Gross Domestic Product (GDP), the total value of goods and services produced by an economy during a period. It is made up of four components: Consumption, investment, government expenditures, and net export, hence the equation Y=C+I+G+NX. This equation actually tells us that taxes are irrelevant for welfare. More tax would mean there is less of the C and I components and more of the G component. This said, whether or not tax is evaded will have no net change on national welfare.
That being said, the important question thus is: Which component has the bigger multiplier effect? Does government spending have a bigger multiplier effect than national consumption and investment? The answer to that question is: It depends!
If the government utilizes their money to build more infrastructure such as bridges, interstate highways, harbours, railways and airports; then probably the multiplier effect of government spending is huge. It could induce more investment to come to Indonesia. Such will also be the case if the government uses the money to improve their services like education, healthcare, and the like.
However, let us now take a look at how the government is actually spending our money. The 2010 national budget shows that 20% of government expenditures was spent on subsidies, which is never a good idea. Another 22% of the budget is used for the payroll of state servants, whose numbers are way more than actually needed. To add insult to injury, Indonesia ranks 110th out of 178 countries on the Corruption Perception Index by Transparency International, and it was estimated that almost a third of the national budget was lost due to corruption.
Now imagine if the some money supposedly used for fuel subsidies were evaded by let’s say Bakery Sisters, and with that money they went on and invested on a new factory for one of their subsidiaries. Many people would then get hired, national consumption of the product would rise, and the economy as a whole would grow more. The multiplier effect would be enormous. On that note, Bakery would be doing economy more good if they evaded taxes.
A simple comparison: Imagine a billboard on a busy Jakarta road that costs Rp 60 million a month to put up. It could be used for an advertising by for example the telephony giant Ezio (a Bakery subsidiary), or by a government ministry as a way for the minister to show his face and wish the people a “Happy Idul Fitri”. Both would increase GDP by Rp 60 million. Nonetheless it is no rocket science to figure which one is better.
To conclude, it must be understood that this writing is not meant to promote tax evasion. It is to open our eyes, that we taxpayers should demand better usage of our money, and better fiscal management. The alternative is there. Unless the government utilizes our money for more productive services mentioned above and crack down on corruption, we might be better off if more people evaded taxes. And surely nobody would that to be the case.
Tax evasion is the effort to escape from the duty to pay taxes, normally by misstating financial statements and/or bribing government tax collectors (the IRS, or Ditjen Pajak). It was reported that in the year 2010, the RI government suffered a total loss of Rp 5.8 trillion (around US$ 60 billion) due to tax evasion. One thing is certain, tax evasion is always bad for the government. But what about the economy as a whole?
The most used measure of the welfare of an economy is the Gross Domestic Product (GDP), the total value of goods and services produced by an economy during a period. It is made up of four components: Consumption, investment, government expenditures, and net export, hence the equation Y=C+I+G+NX. This equation actually tells us that taxes are irrelevant for welfare. More tax would mean there is less of the C and I components and more of the G component. This said, whether or not tax is evaded will have no net change on national welfare.
That being said, the important question thus is: Which component has the bigger multiplier effect? Does government spending have a bigger multiplier effect than national consumption and investment? The answer to that question is: It depends!
If the government utilizes their money to build more infrastructure such as bridges, interstate highways, harbours, railways and airports; then probably the multiplier effect of government spending is huge. It could induce more investment to come to Indonesia. Such will also be the case if the government uses the money to improve their services like education, healthcare, and the like.
However, let us now take a look at how the government is actually spending our money. The 2010 national budget shows that 20% of government expenditures was spent on subsidies, which is never a good idea. Another 22% of the budget is used for the payroll of state servants, whose numbers are way more than actually needed. To add insult to injury, Indonesia ranks 110th out of 178 countries on the Corruption Perception Index by Transparency International, and it was estimated that almost a third of the national budget was lost due to corruption.
Now imagine if the some money supposedly used for fuel subsidies were evaded by let’s say Bakery Sisters, and with that money they went on and invested on a new factory for one of their subsidiaries. Many people would then get hired, national consumption of the product would rise, and the economy as a whole would grow more. The multiplier effect would be enormous. On that note, Bakery would be doing economy more good if they evaded taxes.
A simple comparison: Imagine a billboard on a busy Jakarta road that costs Rp 60 million a month to put up. It could be used for an advertising by for example the telephony giant Ezio (a Bakery subsidiary), or by a government ministry as a way for the minister to show his face and wish the people a “Happy Idul Fitri”. Both would increase GDP by Rp 60 million. Nonetheless it is no rocket science to figure which one is better.
To conclude, it must be understood that this writing is not meant to promote tax evasion. It is to open our eyes, that we taxpayers should demand better usage of our money, and better fiscal management. The alternative is there. Unless the government utilizes our money for more productive services mentioned above and crack down on corruption, we might be better off if more people evaded taxes. And surely nobody would that to be the case.
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