Monitoring Superrich: the Effects of Indonesian High-Wealth Individuals (HWI) Tax Office

Abstract

I study the effects of monitoring high-wealth individuals on tax compliance and revenues. I exploit quasi-experimental variation generated by the implementation of the Indonesian High-Wealth Individuals (HWI) Tax Office in 2009, which monitors individuals with gross assets of more than 100 billion IDR (around 10 million USD in 2009) and who reside in Jakarta (Indonesian capital). I compare reported income and income taxes of HWIs administered by HWI Tax Office and HWIs administered by ordinary tax offices before (2007-2008) and after (2010-2014) the policy. I document that the reported income and income taxes of HWIs administered by the HWI Tax Office decreased by 43.9 percent and 40.5 percent, respectively, over six years relative to those of HWIs administered by ordinary tax offices. The results support the literature that predicts that in the face of a highly probable scrutiny the optimal strategy for HWI might involve some underreporting of income.

Keywords:

• tax compliance
• tax reform
• high-wealth individuals
• Indonesia

JEL classifications:

• H24
• H26
• H32

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ACKNOWLEDGEMENTS

I am grateful to my advisors David Agrawal, William Hoyt, Rajeev Darolia and Michael Reed. I thank Kenneth Tester, Jawad Shah, Quinton White, Sekti Widihartanto and Partomuan Juniult for invaluable comments. I also thank to the editor and the referee(s) for indispensable comments to earlier drafts of the article. I greatly acknowledge the doctoral scholarship from the Indonesia Endowment Fund for Education (LPDP).

Notes

1 Wealth has been commonly used by government as a tax base to increase progressivity of a tax system. The literature on wealth tax suggests that wealth tax affects wealth accumulation, mobility, and evasion (Seim 2017; Jakobsen et al. 2020; Brülhart et al. 2022; Agrawal, Foremny, and Martínez-Toledano 2020). Scheuer and Slemrod (2020) provide a nice survey on taxing wealth, discussing the behavioural responses to a wealth tax as well as optimal wealth tax theory.

2 Government Regulation number 19 year 2008 concerning Income Tax on Dividend obtained by Domestic Individual Taxpayers

3 Around 15 Regional Tax Offices have no MTO under their supervision.

4 Appendix Table A.1 shows that the majority of taxpayers (top 5 percent income earners) administered by the HWI office have over 40 percent of their total assets in terms of stocks (not held for sale).

5 Director General of Tax Decision number KEP-53/PJ/2009 mandated 1,203 wealthy taxpayers to be administered by the HWI office starting May 1, 2009. On August 1, 2009, around 11 wealthy taxpayers were added to the HWI unit by Director General of Tax Decision number KEP-80/PJ/2009.

6 During the period of analysis (2001-2014), policies regarding relaxation of bank secrecy for tax purpose and automatic exchange of information (AEOI) have not been implemented.

7 Alstadsæter, Johannesen, and Zucman (2018) shows that Indonesian wealthy individuals have the highest propensity to own assets in tax haven countries relative to their counterparts in other countries.

8 In 2017, the government rules that the access to banking information for tax audit purpose can be obtained no longer than 14 days since the request is placed by the tax authority to the Financial Service Authority (OJK).

9 Director General of Tax Decision number KEP-102/PJ/2012 mandated 972 state-owned corporations to be administered by the HWI office starting April 1, 2012. There has been no document that explains the rationale of this policy.

10 Appendix A describes the distribution of income and assets at the HWI office used in the construction of the comparison group in this analysis.

11 Appendix Figure A1 reports the percentage distribution of reported net income at the HWI office before (Panel A) and after (Panel B) the reform. The figure suggests that during my data period the composition of income groups at the HWI unit is relatively stable.

12 Appendix Table B4 shows that the coefficients from standard DD specification in Equation (8) using taxable income as an outcome are similar to the results from the specification that uses reported net income as the outcome. The results also robust in both balanced and unbalanced panels. Appendix Figures B3 and B4 show the event study graphs for the specification that uses taxable income as the outcome.

13 The event study graphs that plot the regression coefficients (b and a) from the estimating specification (7) are presented in Appendix F.