One way to internalize externalities is by introducing environmentally related taxes. It is also effective and efficient instruments for environmental policy. However, I think that this idea is not suitable –or have to be prepared more carefully– in the developing countries and less developed countries –in this paper, I use Indonesia as an example- where corruption is innate. I firstly discussed briefly the problems of tax collection and of tax-generated revenue usage in the context of third world countries. Secondly, I argue that tax may further increase environmental damage through increase in natural resources extraction. Thirdly, the problem of marginalized people dependency on cheap-yet-environmental-harmful products and services is brought into the paper. Fourthly, I discussed the effect of environmental taxes to the national competitiveness. Lastly, considering those four reasons, I argue that social responsible approach is better than environmental taxes in the third world countries.
Taxes contribute 66.59% of Indonesian’s National Budget income in 2006. Whilst, the not-taxes incomes are earned from natural resources-related income and state-owned enterprises profit. However, despite of tax administration reform started in 2000, the taxes mentioned above are only collected from 1.71% of Indonesian population. It shows how big the scale of tax evasion in Indonesia is. In my opinion, there are two important issues regarding this matter, which is social trust towards tax collectors and the perceived benefit of paying taxes.
First issue, the public trust regarding tax collectors –and to other civil servants- are low. Taxation department is seen as the dent of corruption. Corruption is initiated in two ways that is of tax collectors and of taxpayers. The first way, it is believed by public that tax collectors always calculate higher tax than of taxpayers’ calculation. The main reason of doing so is so that taxpayers choose to bribe tax collectors, instead of going through the time-consuming court settlement of tax dispute. The second way, taxpayers deliberately offer tax collectors some amount of money in exchange for lower tax calculation and thus saving some money. Another “advantage” for taxpayers of doing so is time-saving. Second issue, in Indonesia, paying taxes has long been perceived as not giving direct benefits such as social securities to the taxpayers. To some extent, this perception discouraging taxpayers from paying taxes.
From the point of view of welfare analysis, there is a dead weight loss created from three effects of environmental taxes which are budget gained from additional tax revenue, consumer’s loss as price increased and quantity consumed is decreased, producer’s loss as quantity decreased and the taxes burden (i.e reduced firm’s profit). Yet, there is environmental benefit gained from less environmental damage as quantity is decreased. The net welfare is positive as long as environmental benefit is bigger than dead weight loss, vice versa.
However, taking the corruption into account, I think that a positive net welfare is harder to achieve. My reasoning is that the environmental taxes revenue will not fully receive by state, as it is distorted by corruption, and thus lowering the budget gain. Meanwhile, the producer’s loss and consumer’s loss remain same and thus the dead weight loss is bigger. Therefore, introducing environmental taxes in heavy corruption countries may further harm the net welfare. Furthermore, environmental taxes, in these circumstances, will give incentive to corrupt more and hence increase the rate of corruption.
One of the environmental taxes goals is to conserve environment through reducing consumption and reducing natural resources extraction. The consumption reduction is achieved due to price increase. As consumption is reduced, logically speaking, the production is also reduced and thus the need of raw material is decreased. However, Chichilnisky (1994: 855) argues that “taxes can lead to more extraction of resources, defeating their original purpose”. The logic behind it, first, is as the demand for raw material decreased, the resource’s price is decreased, and thus the extractors’ income is declined too. Second, the extractors –many of them are subsistence workers- will extract more in order to arrive in the same income level. Why is this not happening in developed countries? The reason is that natural resources are capital-intensive goods while they are labour-intensive goods in third world countries. Thus, the environmental taxes can be a backfire to environmental conservation. This is another drawback of tax.
Additional tax means additional cost to consumers. In the marginalized community where income is low, a cost increase is harmful. If the community is dependent on those products and services –signalled by relatively inelastic demand and high consumption rate-, then the harmful effect will be magnified. The government often tries to keep the cheap price as the products and services are of basic needs such as fuel (gasoline, kerosene, and gas), water, electricity, and food. To some extent, price increase can cause social distress and political instability and then it increases social costs. Again, there is possibility that environmental taxes are harmful to the net welfare. Of course, the effect of price increase can be compensated by returning taxes to the community through subsidies. However, we have to bear in mind that different goods have different utility functions. Thus the compensation may not always be able to replace the cost.
Imposing environmental taxes can lowered the national competitiveness especially in the region where there is not standardized environmental policies among countries. Environmental taxes are hurting both the country and the company. It hurts the country as tax decrease the country’s investment attractiveness compare to other countries that are not imposing that tax. It can even –to some extent- induce company relocation. Instead of giving “double dividend”, environmental taxes can lower employment in that country. Environmental taxes hurt the company as it increase product price and make it less competitive in international or regional markets. In my opinion, when this kind of taxes is going to be imposed, then it should be imposed and standardized in the closely related geographical region and trade partners such as in EU and NAFTA agreement.
In summary, I argue that imposing environmental taxes in third world countries such as Indonesia may have drawback that can exceed the benefit of environmental taxes. I give four reasons that is corruption, intensifying natural resources extraction rate, increasing social distress and political instability, and weakening national competitiveness. Considering these drawbacks, I prefer more to the social responsibility approach. First, it minimizes interventions from state and thus reducing the corruption opportunity. Instead of having “double dividend” from increasing employment, the “double dividend” of social responsibility is the decreasing corruption rate. Second, the approach tries to ensure ethical business practices. One of the ethical principles is to pay adequate salary to the workers and to buy accountably extracted raw materials with equitable price. Third, the approach usually caused less cost to the company compare to the cost from complying regulation. It implies that product cost may not increase higher than if it is taxed and thus it does not hurt company’s product competitiveness. In addition, it may open new markets for the social responsible products. Moreover, the approach does not influence national competitiveness as it is usually a voluntary involvement. However, social responsibility approach needs public control and facilitating bargaining from the country.
Harian Bisnis Indonesia, 10 juta NPWP dikaji Ulang (translation: The number of 10 million taxpayers will be checked again), 16 May 2006.
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