Introduction
Franklin D. Roosevelt once remarked that taxation is the lifeblood of government and economic stability is its heartbeat. In 1935, the 32nd President of the United States establish the "Soak the Rich" tax or known as the "Wealth Tax Act" or "The Revenue Act of 1935". The Revenue Act faces fierce opposition from businesses, the wealthy and conservatives because it introduced a progressive tax structure that levied up to 75 per cent of top income. The act's progressive tax system aims to redistribute wealth and lessen economic inequality.
This strategy was designed to increase lower-income people's financial security and encourage consumer spending, which could promote economic stability. The Revenue Act of 1935, implemented in the United States, introduced higher taxes on higher-income individuals and corporations intending to generate revenue and address economic challenges. Despite the absence of a wealth tax at the moment in Indonesia, the implementation of a well-designed progressive-income-tax system could potentially contribute to economic stabilization.
The Absence of Wealth Tax In Indonesia
Income disparities and wealth inequality has been the major problems in Indonesia. Based on Central Agency on Statistics (BPS) in September 2022, there is 9.57 per cent of the population (26.36 million people), living in poverty. The wealth of the top four men in Indonesia, as stated by Oxfam (2017), exceeds that of the bottom 100 million people combined. Nevertheless, as reported by World Bank (2022), Indonesia's Gini Index is at 37.9. The Gini Index is a commonly used indicator of wealth or income disparity within a nation. It denotes a modest degree of wealth or income disparity within a nation. Based on that index, Indonesia has a level of inequality that is neither extraordinarily high nor extremely low. It implies that there are some income or wealth discrepancies, though perhaps not to the same extent as in nations with higher Gini Index values.
These numbers demonstrate the demand for Indonesia to enact a wealth tax. An implementation of a wealth tax in Indonesia could help to reduce income inequality, encourage a more equitable allocation of wealth, and improve overall stability by bridging economic gaps. IMF (2021) in 'Tax Law Design Considerations When Implementing Taxing Instruments to Support the Recovery From COVID-19' introduce wealth tax as the new taxing instrument and a structural change in designing domestic tax tools to support measures taken in response to the COVID-19 outbreak and its aftermath.
A wealth tax may take the form of an annual tax at a specific rate imposed on all net wealth (defined as financial and non-financial assets less debts) that exceeds a certain exemption threshold. It may be more consistent with any overarching legal concept relating to the ability to pay to allow debts to be taken into account when calculating the tax base. Despite that, Indonesia's Ministry of Finance stated that the implementation of net wealth tax or wealth tax is still challenging to implement in response to the IMF's advice on wealth tax. In terms of asset inventory and valuation, the wealth tax's application is limited. Therefore, while it may happen in the future, the implementation of a wealth tax in Indonesia is still rather far off.
As an alternative to address wealth inequality and generate revenue, Indonesia can concentrate particularly on people with a significant net worth or sizable incomes. It is frequently made to appeal to a more specific group of people, usually those with substantial financial resources. High Wealth Individual Taxes (HWIT) can be applied in several ways, such as by increasing income tax rates for people above a certain particular amount threshold, or by levying additional taxes or surcharges on high-income earners.
HWI Tax: A New Facade Of Indonesia's Economic Stability
The discussion surrounding wealth disparity and its effects on society has received a lot of attention recently. The introduction of an HWIT has come to light as a potential remedy to solve this problem and encourage economic stabilization. The HWIT targets people with significant wealth and directs the money it raises toward crucial societal projects to ensure that the tax burden is distributed fairly (IMF, 2018). Firstly, HWIT provides a progressive method of taxation by requiring those with great wealth to contribute a larger percentage of their income. An HWIT shifts the tax burden away from people who are in the lower-and-middle income categories and toward those who can afford to pay a larger share of the tax burden. The goal of this wealth transfer is to close the wealth gap and establish a more egalitarian society.
Secondly, economic growth can be influenced favourably by the HWIT installation (W.G. Dale, 2014). High-wealth persons are financially motivated to invest their wealth in profitable endeavours rather than keep it when they pay more taxes than average taxpayers. This additional investment may stimulate the economy, resulting in the development of jobs, new ideas, and general economic expansion. Additionally, the HWIT monies that have been transferred might be used to make investments in SMEs, which are significant economic growth drivers.
Thirdly, HWIT is creating revenue that can be used for important societal investments is one of the main goals. This tax's proceeds can be used to support initiatives in the fields of social welfare, healthcare, infrastructure improvement, and education. Governments can improve the standard of public services, close socioeconomic gaps, and create possibilities for career advancement by investing in these sectors.