Essays on Indonesian taxation, inefficiency, and corruption

This thesis consists of three papers. The first one investigates and compares both current and proposed Indonesian income tax structures from the efficiency point of view, whereas in the former, earned income is taxed with different rates and interest income is taxed uniformly, while in the latter, both earned income and interest income are taxed differently with the same tax rates for each individual. From the efficiency stand point, the proposed tax system may generate the same results as the current one, but it is only true in the first-best solution, where marginal tax rates on both earned and interest incomes are zero for all individuals. If the first best solution is not feasible, however, the current tax system is more preferable.;The second paper attempts to estimate the tax potential of two sources of revenue for local governments: local taxes and property tax—by using the special regression analysis of the stochastic frontier. Our empirical findings show that none of the local governments have maximized their tax potential. If all local governments were able to utilize all their tax potential, then they would get very substantial additional tax revenues (0.14 and 0.18 percent of GDP from local taxes and property tax, respectively, while current total local tax revenue is about 0.36 percent of GDP).;The third paper attempts to identify factors that determine the level of inefficiency of Indonesian local governments in terms of the use of their tax potential. Our empirical findings show that for local taxes, there are two sources of tax inefficiency: (i) corruption has a negative significant impact for local governments on their ability to collect their tax potential, and (ii) subsidies from the central government, especially INPRES subsidies that are used for local development projects, also negatively affect local government tax ratios. For property taxes, the main source of tax inefficiency is the target set by the central government that apparently tends to be far below the actual tax potential.